Impact investing and the new ‘MAD’ economy
By Lisa Wade
The world is undergoing a fundamental shift, making impact investing an integral part of the investment universe.
The way we do business, manage investments and view businesses is rapidly changing. This has impacted investment returns and created new opportunities. We call this ‘Make A Difference’ or ‘MAD’ economy.
According to the Global Impact Investor Network, impact investments are “investments into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return”. It is simply investing for an outcome and the term has come to signify a positive outcome. However, all investments have an impact, and you, as an investor, can choose if its positive or negative.
Environmental, social and governance issues are no longer being viewed as ‘bylines’. They are now rightly seen as two sides to the same maximising returns coin. Companies that are well placed in this sphere will win the race to compete for capital.
There is also a technological revolution going on in the way you as an individual can manage your own money. The days of simply receiving a monthly return will be long gone. As we enter the age of greater transparency, we will be able to see where our money is, what it is doing and have a lot more say over how it is managed.
MAD? This can be overwhelming at first but with a little awareness you can empower yourself to achieve positive returns and invest in companies or organisations that you believe in. A lot of people look up to Warren Buffet as an investment guru. Over the years I have been involved at the back end of some his transactions. If you take a helicopter view of how he invests this is pretty much it: he finds companies and the thematics he believes in and invests in them.
I want to point out here that impact investing is just fundamental investing with a filter. It is up to
you to choose what the filter is, what your values are and what impact you want to have. The one thing that binds impact investors is our desire to make a difference. The question to ask, therefore is, what is the cost if I don’t align my values to my investments?
I believe those at the forefront of this investment revolution, the pioneers of the MAD economy, will be the zillionaires of tomorrow and I believe that overhauling your portfolio will enable you to travel with them. This goes beyond your investments to a way of life – it is the products you buy, your fundamental day to day consumer behaviour and your overall wellness.
At Impact 2080, we have realised that for impact investing to truly take off, we all need to broaden our definitions of impact investment.
We have started to look at the world in terms of shades of impact. And to make it easy we have used the colour green. Green means environment to many. To us its bigger – it’s a pathway to understanding so that all investors can start to align their values to their investments. We have developed an investment matrix to allow investors to see their investment universe through this lens.
To create this lens, we have broadened our investment philosophy from a traditional two dimensional risk/reward approach to a four dimensional approach, or 4D investment philosophy as we call it internally.
What are the four dimensions? Risk, Reward, Impact and Alignment. The last two categories can be subjective. However, it is possible with the magic of data to assign values to this subjectivity and apply investment process around portfolio construction. I’ll leave the investment geek stuff here but rest assured you can construct a portfolio to any shade of “positive” or green you like. So what do we do? We take every investment in the world, run it through some screens and work out the shade of “green” it is. We then ask our customers to consider how green they want to be and we construct their impact investment world. Sounds simple? Yes, it is. For us, every person is a shade of green, and whether we like it or not ALL our investments have impact.
Some investments can contribute positively to the world in terms of what they do and why they do it. It could be a solar farm, a solar schools project, an organic farm, a responsible investment fund, a solar fund, or a 3D printing company. Plus, the returns have to be good. So at any one time this looks like about 40-60 holdings just to give you some perspective.
We could spend an entire day arguing definitions of shades of green but really the reason why we look at the world this way is to simplify a complex process to enable investors to align their values to their investments. We don’t want to tell people what to think, we want to enable them to get the shade of green they want. Simple. Just like a plane taking off, it might be a private jet or you may get on the light green airbus 380, investors deserve to choose.
Impact investing market is maturing. It offers diverse and viable opportunities for investments and it is really up to you how you apply it. Organisations such as Blackrock and the Emerald Wrap are also making it easy for you to construct your portfolio as well as a range of specialist advisers in the market who can help. But really it starts with you! You are you own impact.
*Lisa Wade is a co-founder of Impact 20/80, an associate company of the Emerald Wrap, Australia’s only ESG-focused investment platform.