Our region’s commitment to community is on full display in the pages of this issue, with companies taking on a wide range of challenges and causes. Some focus on climate change through green products or their own sustainability efforts. Others empower the workforce of the future through job development and social entrepreneurship. And others, namely nonprofits and the corporations that support them with pro bono efforts, by their very nature, are built for impact.
While the strategies of each company or organization may differ, their desire to create positive change ties them together. Each has their own reasons for their community engagement and derives their own utility from their initiatives.
The most successful and sustainable are those that define their desired outcome early and use it as a guiding force. The same can be said for individuals, families and foundations engaged in impact investing.
Put simply, impact investing is investing in companies, funds and projects to generate both a measurable social benefit and a financial return. It’s an established but evolving phenomenon driven by the recognition that individuals can influence a company’s corporate citizenship. Like community impact, while the strategies may be different, each investor shares a desire to create positive change.
Defining an impact investment is a personal decision. However, any investor is ultimately limited by the marketable investment choices. We consider impact investing as a spectrum. At one end, the focus is on filtering out companies whose values are not aligned with an investor’s, like those involved with tobacco and firearms, while allocating capital to companies that meet certain environmental, social and governance (ESG) metrics. At the other end, investors allocate capital to direct, often private, investments that specifically reflect an investor’s desire to advance a cause, such as stemming climate change.
Traditional measures of investment success focus on return and risk. Measuring the success of an impact investment entails more than just financial return. In client discussions, I often refer to this as the utility of return, or the individual values in financial gain combined with the social value of their investments.
Defining utility in impact investing helps define the strategy. For example, performance metrics of renewable power investments may highlight the power generated from renewable resources and the “impact statistics,” such as the displacement of greenhouse gases by not generating power from fossil fuels. In another case, individuals may invest in affordable-housing projects that aren’t designed to deliver market-rate returns and require a longer-term commitment.
No, this isn’t philanthropy, and yes, there is a financial benefit to the investment. The utility in this case includes creating something tangible to address a social problem in the community. Utility also helps set metrics to measure performance in private investments. Does that private renewable-energy project deliver utility based on how much carbon it offsets or how many jobs it creates? What’s the measure of success for affordable housing? Is it the number of living-wage units available, how many families can be housed, how it’s supporting a specific part of the population or something else? Utility is critical to impact investing because it defines success.
Sourcing and evaluating impact investing opportunities takes deep analysis. It also takes considerable time to define what utility you want an investment to deliver. Our changing society is already expanding traditional ESG measures. And empowered investors will create more private investments that mirror their values. Much like the Community Impact Award categories have expanded over the years, the way impact investors want to change the world will continue to evolve.
The companies recognized in this issue have a clear sense of the utility they derive from their community efforts. The same principle should apply to impact investors, as utility sets the tone for true and lasting impact.
Gino Perrina is chief investment officer at Seattle-based Laird Norton Wealth Management. Reach him at email@example.com or 206.464.5100.