Tuesday, November 12, 2013

Launching the Bay Area Impact Investing Initiative

I attended last week's official launch of the Bay Area Impact Investing Initiative.  I met the movers and shakers behind this project prior to this year's SOCAP conference and my blog article about their ideas sums up their approach.  This isn't just some charity effort to channel giving.  BAIII wants to show fiduciaries how to obtain market-rate ROI from ESG investments.

Lauren Agnew from Seal Cove Financial broke out brief descriptions of real estate, private equity, and infrastructure as separate asset classes.  I think there are plenty of impact investing opportunities within each category.  I've blogged before about how land trusts can configure real estate parcels for long-term investment, so isn't much of a stretch to attach impact investing criteria to them.  Private equity has an obvious role to play in microfinance as angel investors flock to crowdfunding portals.  I see no obstacles to rating infrastructure projects according to environmental impact criteria to make their funding more marketable.  The Global Impact Investing Network created its Impact Reporting and Investment Standards (IRIS) for those of you who need impact evaluation metrics.  The IRIS registry looks like a good connecting tool for institutions looking to either attract or deploy capital.

The panel got going and I discovered that Pacific Community Ventures' PCV InSight research practice has published quite a bit of thought leadership on this subject.  The panelists mentioned that advisors' lack of education on impact investing and the scarcity of available products have been roadblocks to the widespread adoption of impact investing despite obvious demand.  I've read recently that independent advisors are concerned about competition from discount brokers as clients seek more control over their money.  I also think that AI engines like Personal Capital will put a lot of RIAs out of business.  If small-practice advisors are a dying breed, it behooves impact investing practitioners to either configure their products for automatic inclusion in the AIs' engines or focus on marketing products through the big SIFI investment banks.  The panelists mentioned that several wirehouses  are all at various stages of launching their own impact investing initiatives.  Morgan Stanley brands it "Investing with Impact."  UBS has an Impact Investing Private Equity fund.  Goldman Sachs offers a fund and bonds for social impact.  I've had some experience dealing with all of those firms in one way or another and I can't exactly give them ringing endorsements for doing the right things.  They all received bailouts during the 2008 crisis.  I cannot assure my readers that they will not need bailouts again in a renewed crisis.

The panel mentioned that US pension fund trustees are reluctant to second-guess their plans' investment policy statements on value investing, but place-based investing is very consistent with their fiduciary duties.  I did not know that the vast majority of California's private equity investing is confined to a small number of ZIP codes.  I had to look up the source for that concentration in PCV's 2007 report on CalPERS' California Initiative.  If you need more reportage, check out McKinsey's research on social impact bonds.  One panelist mentioned that the Affordable Care Act will offer massive impact investment opportunities as the mandates for community health care clinics creates demand.  I wonder whether sovereign wealth funds do impact investing.

One of the last public comments during this launch event revealed something I should have suspected.  A panelist revealed that many thought leaders and activists in impact investing are unable to select impact investments in their own portfolios . . . because their families control their assets!  Well, that says it all.  Is this whole movement driven by trust fund babies who can afford not to work?  This is merely anecdotal but it jives with my impression of the trust fund kids I've met in this town who never seem to have real jobs.  I suppose somebody has to have time on their hands to make this happen.  Kudos to these folks for doing something productive and not wasting time.  If they ever get tired of working the crowds at investment conferences I'd be happy to take their places.

I look forward to more exciting developments from BAIII.  The movement reminds me of CalPERS' leadership in activist investing back in the 1990s.  Cal-PERS forced underperforming companies to shape up their operations based on traditional metrics.  That movement lost steam when institutions turned away from shareholder activism to alternative investments.  Too many pension plans lost their way when they started copying the Yale University endowment's model and had to watch their portfolios blow up in 2008.  Impact investing is one way to ensure institutional investors keep their eye on important things rather than fads.