Social Impact investing: A new frontier?

A new concept has been unfolding stealthily in the last decade, it is been hatched in various talking shops, NGOs and universities. Cynics say it is a fad of very questionable value, optimists say it is the holy grail that will solve all of the world’s problems. Realists – like myself – believe that it is a positive development with the potential to increase global prosperity and opportunities for those left out of mainstream finance. The concept is Social Impact Investing and at its core is the belief that the pursuit of the public good can be incorporated into traditional investment decision making. In essence, social impact investors seek to prove that doing good to society is not necessarily decoupled from making good returns on investment.

Socially Responsible Investing (SRI) has been in vogue for many years and has been mainly practised through the use of negative screens. So investors can decide not to invest in tobacco companies, strip mines, users of child labour etc. Social impact investing takes this further by applying positive social and environmental screens to investment decision making. Impact investors have double bottom-line investment criteria: the investments must make sense from both financial and social perspectives. Money must be there to be made and lives must be improved in the process. Empirical data has shown that companies and investors have profited – in clear monetary terms - from becoming greener and/or becoming more socially conscious. Wal Mart – the biggest discount retailer – is expected to save hundreds and millions of US Dollars from its green initiatives. It is saving energy costs, reducing its carbon footprint and improving its operating margins simultaneously. Fedex is expected to also save millions of dollars in annual fuel costs through the introduction of hybrid vehicles into its fleet of delivery vans.

On the investing side, Mohammed Yunus’ work with the Grameen Bank has proven that a portfolio of microloans granted to poor market women in Bangladesh is not necessarily riskier than a corporate loan book in the United States or Europe. The financial results published during the IPO of Banco Compartamos , a for-profit microfinance bank in Mexico has also shown that microfinance can be very profitable. This robust historical financial performance made the IPO 13 times oversubscribed. Microfinance is not the only success strory, companies have made money investing in clean energy sources, promoting healthcare in poor and undeserved communities and regions and affordable (not subprime!!) housing.

The Clinton Global Initiative (CGI) – often derided as the “Philanthropy Oscars” because of its glitz – has teamed up with JP Morgan and the Rockefeller Foundation to set up the Global Impact Investing Network (GIIN). GIIN will work to set up common standards, benchmarks and infrastructure to speed up the adoption of impact investing worldwide. Its work may end up motivating businessmen and activists to jettison the counterproductive “sue the bastards” approach that had characterized their relationships in favour of mutually beneficial partnerships.

Book review: The Partnership

Just finished reading a newish book ; The Partnership: The Making of Goldman Sachs, written by Charles D. Ellis. It is the most enjoyable business book that I have read so far in my - admittedly young - life. I found the book to be very engaging and instructive not only to investment bankers and potential investment bankers, but also to anyone interested in building a knowledge based organisation. Some of the reasons I enjoyed reading the book include:

Thematic arrangements: this just sealed it for me. I don’t know what goes through business writers' minds that make them organise books in chronological fashion. I am tired of reading books with arrangements such as "the Early Years: 1870-1900", "Dawn of a new century: 1900-1920". I honestly find this practice quite unhelpful as few lessons in business - as in life generally - are chronological in nature. Lessons - at least the valuable ones - tend to be in themes that cut across various years and they should be treated in a coherent manner. The author had the foresight to group the chapters around themes that have defined Goldman Sachs' success with chapters such as "Getting Great at selling": that describes how Goldman Sachs built a vibrant institutional sales force over a few decades. While in the “Innocents Abroad” chapter: the author traced Goldman Sachs' efforts to expand internationally and the successes and interim failures that the firm experienced on the way to its current global reach and dominance.

Informed 3rd party view: a lot of similar books written recently have been from ex-employees of the subject companies. These employees broadly tend to either want to sing the praises of their former employers or bust their bubbles. These viewpoints inevitably tend to colour the books that they author. The author of this book has the double privileges of inside knowledge and objectivity that come from having an extensive and long lasting strategy consulting relationship with his subject, Goldman Sachs. I believe this unique perspective has resulted in a book that is neither adulatory nor vindictive in its tone and approach.

It is not an epic saga: authors of some of the books that I have read on the history of companies tend to view their brief as an invitation to spin colourful stories about larger than life characters and forget that readers are actually supposed to learn something from buying the book. The Partnership has its fair share of vivid descriptions of powerful personalities but the author does not lose sight of the broader, more important objective of providing readers with positive case studies to ensure they learn from reading the book.

The book has not only increased my knowledge of investment banking and financial markets, it has more importantly given me some insights into the steps that can help an organisation achieve greatness. I would give the book a 5/5 rating and advice anyone with some time on his hands and money in his pocket to go grab a copy now!.