What we learned: Investigating the ‘impact’ in impact investment

‘Every [financial] investment is an impact investment. The problem is that most people don’t know if their investments have a positive or negative impact.’

Jochen Wermuth, 100% IMPACT Network member and founder of Wermuth Asset Management

Impact investing is making waves. Leading financial institutions are moving into the field, with over $10trn of global assets now invested sustainably, the vast majority centred around incorporating environmental, social and governance (ESG) factors into decision making. Purer impact investing, promising both competitive financial returns and a positive social impact, is now estimated to be at least $114bn.

But it’s vital to specify and quantify that promised social impact. As stated by Jayne-Anne Gadhia, CEO of Virgin Moneydeveloping a robust framework for measuring non-financial outcomes with clear and identifiable social impacts will be a vital step in securing the future of this market.’

So we are excited today to launch the second impact report of the KL Felicitas Foundation (KLF)—Charly and Lisa Kleissner’s Californian-based family foundation, which has committed 100% of its $10mn endowment to impact investment. Not only are Charly and Lisa investors in enterprises and funds seeking social and environmental impact, they are tireless campaigners—encouraging and influencing other investors to consider impact in their financial decisions.

And key to growing the field is transparency around the social and financial returns that can be achieved within a portfolio of investments. The report, In pursuit of deep impact and market rate returns, is an honest account of their journey and what they’ve achieved to date. It’s one of the first reports, we believe, that analyses and reports on both the social impact and the financial returns of a portfolio. And it’s also a guide for other impact investors wishing to understand their own impact.

Here’s what we have learnt through the process:

Establishing social impact is hard, but not impossible… and should be attempted by everyone

We have developed a light-touch and practical framework, the Impact Risk Classification (IRC), that assesses the likelihood of an investment achieving its intended impact. It is a proxy for impact and can be used to compare impact across a diverse portfolio of investments

There is broadly an inverse relationship between impact and financial performance… 

..and a well-designed impact investment portfolio balances financial returns with social impact

As the chart shows, the significant portion of KLF’s portfolio has returned a net 2.75% pa since inception in 2005, beating the benchmark by 37 basis points. The Impact First investments have returned a loss, -2.5% pa over the 11 years. However the impact-first investments are delivering higher impact (with a higher average IRC score than the rest of the portfolio).

Providing more than capital increases impact

Investors often contribute far more than their investments, and we heard directly from investees the impact of the Kleissners’ additional support—coaching and advising investees, taking board positions, introducing new investors or providing cornerstone finance, as well as their significant efforts in building the field.

This report comes at a time when there’s so much interest in the field and we’ll continue, alongside Charly & Lisa and others through publishing guidance and tools, to encourage funds and enterprises to openly demonstrate the social impact they seek and claim.

Take a look at the full report In pursuit of deep impact and market-rate returns