OEN Member NewsVertueLab Impact Summit – The brave new world of impact investing (Oregon Business)

As impact investing gains popularity, it addresses new challenges.

The emerging trend of socially responsible “impact investing” is grappling with growing pains. Big questions loom on the horizon. How should investors measure environmental or social impact? How can they prove their investments are sincere?

Panelists at a summit hosted by cleantech incubator Vertue Lab (formerly Oregon BEST) on Wednesday addressed the challenges and opportunities for impact investors, as they rethink the performance expectations for business.

Abhilash Mudaliar, research director at the nonprofit Global Impact Investing Network, warned that as more major players enter the impact game, consumers need to be wary of “impact-washing.” Like greenwashers, impact-washers promote ostensibly sustainable investments without measuring the social or environmental impact. As with other trendy labels like diversity and sustainability, increasing popularity could give way to abuse.

Panelists spoke about the challenges and opportunities for impact investing.

Mudaliar says he hasn’t seen much impact-washing to date, but it could be a concern in the future. A set of expectations and standard measurements for impact have yet to be developed.

“How can we tighten the expectations of behavior?” he asked rhetorically. “What do you need to show to prove you’re an impact investor?”

This year saw a surge in impact investments in enterprises that pursue a social or environmental mission alongside profit. Impact assets under management doubled from $114 billion to $228 billion over the past year. The trend crossed private and public, emerging and developed markets.

Panelists attributed the trend to the rise of a new generation of millennial and women leaders who expect social and environmental responsibility from business. These demographic groups are committed to combating climate change, ensuring supply chain transparency and creating sustainable jobs.

“It’s becoming table stakes now,” said David Griest, managing director at SJF Ventures. Griest’s firm manages a $125 million impact fund, which invests in companies spanning renewables, to sustainable food to transportation. “More entrepreneurs who are millennials are aligning values with their businesses.”

Investors have taken notice. Even major private equity firms criticized for putting profits over people are looking at impact investments. Bain Capital launched a $390 million Double Impact Fund. Recently the fund made an equity investment in Portland-based Sustainable Restaurant Group, Bamboo Sushi’s parent company.

Cleantech startups display their innovations at the Vertue Lab summit.

Yet as the approach gains popularity, it’s run up against a number of barriers. One is the dearth of data on the performance of impact companies. It’s important to develop tools, Mudaliar said, that allow companies in the same sector to report against similar standards.

Impact funds also face pressure from investors, who sometimes need convincing about the return on investment. A tension can arise between generating short-term financial returns and long-term social good.

“I think we struggle with showing return while taking outsize risks, and how to balance that,” said Elizabeth Carey, manager of the Oregon Community Foundation’s finance fund.

“I think we struggle with showing return while taking outsize risks, and how to balance that,” said Elizabeth Carey, manager of the Oregon Community Foundation’s finance fund.

The pressure can work the other way as well. Investors might expect startups to implement social and environmental benefit programs while they’re still finding their footing in the market.

“I just can’t imagine if you’re an entrepreneur starting out and you all look the same, then get pushed by an investor to have a diversity plan,” said Sarah Cleveland, a consultant who specializes in sustainable investments. “It’s not all that helpful.”

Impact companies can take longer to mature and generate a profit than traditional businesses. Some funds are turning to a patient capital model, Griest said, in which a new company is allotted more than the traditional 10-year venture capital lifespan.

“The tricky part is finding LPs (venture capital investors) who are patient as well,” Griest said. “That hasn’t been easy to identify so far.”

“How can we tighten the expectations of behavior?” says Mudaliar. “What do you need to show to prove you’re an impact investor?”

If investors can be convinced to ride out the uncertainties, impact investments often outperform the traditional profit-centered approach. Social impact companies often have a thoughtful leadership structure, and engender strong consumer loyalty. They can prove more resilient than a traditional business in an economic downturn.

“Good governance leads to good business,” Carey said. “When you’re providing that filter on your investments you’re going to have outsize return because you’re looking for those best in class companies.”

A number of millennial-led impact startups pitched summit attendees. Wheyward Spirits described its process for distilling vodka from whey curds. Sixty-seven percent of consumers, CEO Emily Darchuk noted, desire more supply chain transparency from food and beverage companies. The startup seeks to correct the rampant deception in vodka marketing, while recycling waste into a usable product.

“It’s an opportunity to transform an industry that’s been deceiving consumers,” Darchuk says, “where low-grade spirits are passed off as craft.”

As it stands today, impact investments in companies like Wheyward Spirits comprise only a tiny fraction of overall assets under management. While educating investors and business owners about the benefits of the practice, speakers said, investors can’t lose sight of the big picture.

“It’s become more popular but it’s still very much a drop in the ocean,” Mudaliar said. “We need to have an impact on all investing beyond just growing impact investing.”

Source: www.oregonbusiness.com