April 18, 2016
Recently I had a conversation with a financial advisor who represents several billionaire clients—all well-known tech leaders in the San Francisco Bay Area. After giving him an overview of our new impact investment company and its business model, and background on everyone involved, he said, “It’s sounds very impressive, but we just don’t do impact investing.”
In another meeting with a wealth advisory firm in Los Angeles, one of the advisors said their advice to a client who had created their wealth through cause-related companies was to “diversify”—in other words, invest in companies that don’t make the world a better place.
Why did they say these things? One reason is that there is a culture within finance that perceives anything that “does good” as something that doesn’t make money. This is simply not true.
The Global Impact Investing Network reports significant returns for impact investors: “Impact investment funds that raised under $100 million returned a net IRR of 9.5 percent to investors. These funds handily outperformed similar-sized funds in the comparative universe (4.5 percent).”
And according to Morgan Stanley:
Sustainable Equity Mutual Funds had equal or higher median returns and equal or lower median volatility for 64 percent of the periods examined over the last 7 years, compared to their traditional counterparts … Benchmark performance of the MSCI KLD 400 Social Index, which includes firms meeting high Environmental, Social and Governance (ESG) standards, has outperformed the S&P 500 on an annualized basis by 45 basis points since its inception (10.14 percent, compared to 9.69 percent for the S&P 500; July 1990-Dec. 2014).
So if the data shows that impact investments are routinely out-performing companies that have no social impact or negative social impact, why are finance professionals hesitant to embrace them?
In search of an answer, I turned to the world of psychology—specifically, the study of “self-schema.” Philosopher Immanuel Kant was the first to discuss self-schema, and pioneering clinical psychologists, including Jean Piaget and Frederic Bartlett, evolved it.
In its simplest terms, self-schema is the way we see ourselves in the roles we play. We develop our self-schema in our childhood, and then our education, career, friends, and relationships continuously reinforce it through our lives. Examples of differing self-schemas include:
Profit-driven vs. passion-driven
Businessperson vs. do-gooder
Independent vs. interdependent
Dominant vs. cooperative
In reading the work of Kant, Piaget, and Bartlett, and attempting to apply self-schema to the psychology of finance professionals, it became clear to me that many finance professionals have a limited sense of self.
Reinforced and conditioned by the “type” of people most of us associate with finance—the hard-nosed businessperson whose life is really only about making money—many finance professionals develop a self-schema that limits their view of who they can be in the world. A career focused purely on the pursuit of profits—with no focus on or responsibility for addressing the world’s problems—has conditioned many to believe that solving social issues is simply not their problem.
It’s understandable why this would occur. Finance is a cutthroat business, where one’s ability to make a profit is rewarded over everything else. The industry celebrates those who make money and forgets those who don’t.
There are, of course, exceptions: Ray Chambers, the legendary private equity investor who has dedicated his life to ending malaria and has achieved astounding results; Paul Tudor Jones, the hedge fund manager who founded the Robin Hood Foundation and has recently launched JUST Capital; and David Tepper, who was ranked as the number-one hedge fund manager in the world in 2012 and who donated $67 million to his alma mater so that others can get the kind of education that brought him success.
These people decided long ago that a part of their role in the world—a part of their overall identity—would be to use the tools they have to make the world a better place. We need them, and we need others. So how can we—including educators, impact investors, and philanthropists—help traditional investors and other finance professionals evolve their sense of self? There are three initial steps:
1. Create opportunities to expose them to social issues first-hand. Seeing a poorly functioning school or walking for miles to find water changes how we think about problems. When meeting with potential investors who may have not experienced the social issue(s) an investment addresses, impact investors and others should help arrange site visits and/or first-hand opportunities to better understand what’s at stake and how they might create positive impact.
2. Debunk the myth of concessionary returns. Sharing reports—from Morgan Stanley, Generation Investment Management, Arabesque Partners, and others—with traditional investors can help educate them on how investments focused on sustainable, long-term social and environmental impact often outperform the market.
3. Create a culture of long-term thinking. World Food Program calculates that we need $3.2 billion per year to reach all 66 million hungry school-aged children today. The number of children who need support will only increase as the world population grows if we don’t address the problem now. By not investing in the future today, we allow existing problems to grow, and bigger problems require more resources and time to solve. We need to make the case for thinking long-term and designing sustainable solutions now.
According to the International Energy Agency, meeting the COP21 pledges—binding framework commitments by governments—will require $13.5 trillion energy-saving and low-carbon investments over the next 15 years. We cannot solve global problems unless the greater world of finance plays an active role—and the key to scaling impact investing is to help investors evolve their sense of self.