15 februari 2015

The case for an impact indicator for investment products

SUMMARY

The G7 Social Investment Taskforce recently appealed for a 'kitemarking label' for (social) impact investments in her final report. But why a mere label? Important is how much!

Is an impact indicator for investment products feasible, as in both possible and practical, that would give investors an idea of the impact of their investment at a glance? And that gives marketeers an interesting instrument to attract lots of cheap(er) capital?

The author thinks is it. But only when mainstream systems for Socially Responsible Investment and equity selection criteria on Environment, Social and Governance (ESG) policies -doing less harm- team up with ESG opportunities and impact investing. The latter investment selection strategy aims at 'doing good' at peoples basic needs level and catalytic fields working on global challenges.

The implementation can be a carbon copy of the recently developed system for standardization and (external) verification of green bonds.

A bonus is that is also works as an impact investing market accelerator.


CONTENT
Acknowledgements
Further research
Diverging or Converging? The civilization process of impact investment and
Do we need a Jerusalem Council for sustainable and impact investing?

Introduction
What an impact indicator could indicate
What an impact indicator would be based on
Ask and thou shalt receive
The Sonen Capital KL Felicitas Foundation methodology for sustainable & thematic investing with asset class based returns.

An impact indicator model

Comments and recommendations:
Harry Hummels: Is it true? Is it expensive?
External verification and leveling impact
Frank Wagemans VBDO
5 levels proposal

A clarification of the Impact indicator levels
Levels 0-6
When does an investment product fit the level?
Flexible or Precise
A peaking impact investment universe?
No, a terraced pyramid
Opening up the investment market
The impact indicator as an accelerator

Conclusion
Feasibility of the impact indicator for investment products
An Implementation path
An accelerator for the Impact investment market

Acknowledgments
I want to thank Prof Jed Emerson, who coined @blendedvalue and publishd a dozen Issue Briefs for Impact Assets. He suggested that I write a clarifying article on the impact indicator model for investment products. It asks for an explanation off the different levels and their distinctions which of course in practice will encounter some difficulty. Which is why the barometer model is useful. 
 
Especially Jed's emphasis on the correlation between risk and return is vitally important to stress that high impact levels however say nothing about returns.
For the impact indicator it turns out to be important to stress that high impact levels say nothing about returns. The traditional perception of the costs of responsible investing are applied to impact investing as well. Partly because of the pioneering area of impact first investing. When return was redeemed for impact. But in earlier drafts of the indicator balancing return and impact to me was so obvious I did not stress it explicitly. But it it turned out to be important. Harvard academic showed in 2011 that best in class investment strategies actually give better returns going back 20 years.

Thanks go to Prof Harry Hummels, University of Maastricht, Actiam IIAM, theGIIN and UNPRI thematic investments who asked about verification and the costs of impact indicating. He inspired me to write the paragraphs on implementation which are actually a carbon copy of the highly successful climate bonds standardization and verification system that has been built over the last last few years.

Drs Frank Wagemans of the VBDO, (the Dutch) Association for Investing in Sustainable Development looked at the model as well and suggested a simplification of the levels which is always a good idea. But in this case I chose to keep the differentiation to avoid having sustainable investment products in sectors that deliver no or little impact to society at large. One of most surprising revelations I had once I got interested in impact investing was when I realized mainstream sustainable investing is mainly about doing less harm and exlusion strategies and hardly about doing good investing with intended positive impact.

And a special thanks to Dr Kellie Liket who inspired me with her thesis 'Why 'doing good' is not good enough'' Essays on Social Impact Measurement 1*. Bust mostly by repeating the question how do you measure you impact? First I came up with an appeal for impact indicator in Impact Investing Nieuws 1juni15 2 followed the draft I will clarify in this article. The impact indicator doesn't give the detailed impact indication that she would like to see. It is not a sophisticated quants (data) of qualits (holistic) impact measurement system. But it does give an indication of impact at investment product and portfolio level. And suits the practice of investing where diversification by spreading risk is part of a sensible strategy.
*Footnotes at the bottom of the page

Further research
As with any thought piece, further research ideas develop once you start. I am thinking of a piece on converging and/or diverging of impact and mainstream investing. A civilization process of investment in the spirit of Norbert Elias classic theory described in the Civilization process. Converging forces are powerful, thanks to hard work of theGIIN, the Global Impact Investing Network and involved major players such as the recent publication linking it's Impact Reporting Investment Standards (IRIS) to the Global Reporting Initiative (GRI) 1.

And a piece on whether enterprises (activities) need to be sustainable to be labeled impact investments. Or do we need a Jerusalem Council in the way Peter and Paul resolved their different views on whether the Christianity was intended for the early Jewish adopters or all peoples who got the message. As long as the impact investment universe is limited, especially in public equity, building a portfolio with sustainable investment products is an obvious choice. But it is worth checking out whether ESG or CSR policies on which the sustainable label is based, focus on core activities or not. 

The case for an impact indicator for retail investment products
The G7 Social Investment Taskforce just appealed for a ''kite marking label'' for social impact investments in their final report (Sept. 2014) 2. But why a(n other) label? Naming something ''impact'' could be as sufficient and (in)effective as Socially Responsible, Ethical, Social Impact Bond, Green or Climate Bond labels are.
An impact label without loading it with impact insight, to me seems mere 'advertising'. Maybe this is a Dutch cynic speaking, as Dutch consumers are overwhelmed by labels communicating -but not very effectively- healthy products, environmentally or animal friendly products, quality certificates etc. A mere label to me seems to underestimate the intention, ambition and understanding of (potential) impact investors and the impact investing market.

Why not give investors an indication of the impact of investment products to be reviewed at a glance? To give investors insight in the non-financial returns of their investment, the impact of their investment. More detailed impact measurement system information can be presented in the impact paragraphs of the prospectus.

What an impact indicator could indicate
An impact indicator would not focus on impact risk, as risk is directly related to return, the risk appetite of an investor and their portfolio allocation. Aiming for more or less impact has risks just as aiming for financial return does. For instance: the risk of poor impact results or even was the intended impact achieved at all? Nor would the impact indicator embody impact costs and cost effectiveness, the choice of impact assessment methods, use of technical assistance, co-operation and lobbying etc. These are part of the business strategy and model and could be part of an adjoining prospectus.

What an impact indicator would be based on
The impact indicator I envision would focus on investment in impact sectors such as:

-1- Basic need sectors: such as work & income, healthy nutritious food, clean sweet water, hygiene and sanitation, affordable health care, affordable education and affordable lifelong job (re)training and last but not least affordable safe green housing to come home to in a safe area. That requires community care and development and what about our global home? So I am adding biodiversity and environmental protection;

-2- It would have a global outlook. Although differences in needs and available affordable solutions are enormous, mega trends such as growing demand due to population and economic growth point out that especially where it comes to fulfilling basic needs, humanity has the same agenda.

-3- It has to include Impact catalyst sectors: such as financial inclusion (micro insurance, -mortgages, -insurance etc. Giving families security and support when disaster strikes. Clean, green and renewable energy and technology and IT. Think IT as in opening up 'information deserts' or worse ínformation monopolies' through access to the Internet and mobile phone connecting peoples and markets. Or sophisticated smart data analyses, helping businesses and consumers to make better use of resources;

-4- It would incorporate existing rating systems, but not so much the rapidly developing impact metrics. But mainstream investment rating with track records and benchmarks. Think sustainable indices, Environment, Social, Governance (ESG) and Corporate Social Responsibility (CSR) ratings. The latter may be getting a bit out of fashion, but it has (had) a positive influence on resource management, labor conditions, local production sites and philanthropic activities. CSR and these days the more popular ESG integration in portfolio management, has been proven financially successful. Especially for best-in-class sustainable companies 3.

-5- And last but not least the scaling potential is included in a long term perspective. The growth strategy, financing structures and shareholders are aligned to get part of the returns re-invested in the impact activities. Multinationals save millions by investing in health & safety, cutting energy, water and resource expenses and re-invests in next phase steps in these field and/or (promising) impact activities for there core activities 4.
Re-investing can be done through rolling out impact activities or in the long run through Research & Development, corporate venturing, (investment) partnerships and through financially innovative structures such as Socially Responsible Equity ensuring re-investing in impact as defined by Alex Hamilton Chan.5
Ask and thou shalt receive
Within a week after pleading for an impact indicator on Impact-Investing-Nieuws Sonen Capital sent me their asset management report for the KL Felicitas Foundation: 2013 Annual Impact Report, Impact Investing in Public Markets: Methodology, Analysis and Thought Leadership. (pdf, 60 pages). Sonen Capital was founded in 2011, specializing in impact investment for investors aiming to achieve financial-, social- and environmental return with public equity fixed income investments. In 2013 it developed a portfolio impact measurement method: Evolution of an Impact Portfolio: From Implementation to Results (pdf, 70 pages) with support of the KL Felicitas Foundation (KLFF). This portfolio model was presented in a report for the World Economic Forum 2014 6.

The KL Felicitas Foundation (KLFF) with it's 10 million US$ assets may be a relatively small foundation compared to some of the impact investing giants such as the Rockefeller and the Bill&Melinda Gates foundation. But it is a pioneer in public equity impact investing with a ten year track record. Guided by big bucks snobbery I never looked into their approach before, even though I came across them in one of the first publications on impact investing I read: Solutions for impact investors: From strategy to implementation 7
(2009) by Rockpa, the Rockefeller Philanthropy Advisors Raul Pomares and Steve Godeke. These days Raul Pomares is director at Sonen Capital.

From 2004 onwards the KLFF searched for the best way 'to build an investment portfolio that would align with their values and the Foundation’s purpose, while also ensuring KLFF’s ability to meet its financial obligations.
It's mission is: to enable social entrepreneurs and enterprises worldwide to develop and grow sustainability, with an emphasis on rural communities and families. The Foundation also actively advocates it's Impact Investing strategy” 8.

In its impact investment strategy Sonen Capital distinguishes between sustainable investors that aim for do no (or less) harm by limiting the consumption of energy, water, resources and limiting harmful emissions; and thematic investors that aim for do good by investing in environment and/or social themes. According to them defined by the United Nations sustainable development catalysts: Employment, Clean energy, Sustainable cities (urbanization), Food security and Sustainable agriculture, Waste management, Disaster resilience and Oceans. In it's asset allocation strategy Sonen Capital uses traditional asset classes system: fixed income, equity, realty etc. Results are presented as returns and impact performance.

Looking at their portfolio allocation strategy and integrating the tradition and ambition of private equity impact (first) investing this is what I propose:
a barometer with increased impact giving special attention to what impact investing is all about developing and upscaling solutions for global basic needs challenges. The barometer design is a copy of the European Union's Risk(baro)meter to give investors insight in the risk of investment products. 


 Landscape Impact Indicator for Investment Products© Impact Bijsluiter

The Impact indicator
0 = I just care about financial returns;   
1 = I care about financial returns and will not invest in harmful industries and products;
2 = I care about financial returns and Environment, Social & Governance risks; 
3 = I care about financial returns and Environment, Social & Governance opportunities;
4 = I care about financial returns and global threats and solutions;
5 = I care about financial returns and peoples basic needs;
6 = I want to invest in impact and I am willing to give up return without giving up scaling potential.
(Formally there could be -1 = I'll invest in anything: even illegal weapon builders, totalitarian regimes etc thus breaking international laws). That should discourage investors and thus will hardly be applied unless the regulators take a stand. 
Note that half of the largest impact investors surveyed by theGIIN and JP Morgan Social Finance state they manage to balance impact and return. Some value impact over return (impact first or catalytic impact investors investing in 'stars', future income earners for sectors or regions) and some value return over impact (finance first) GIIN JP Morgan Perspectives on Progress 2014.

Comments and recommendations
I sent out the first draft of the indicator model with the original appeal to Prof Harry Hummels and Frank Wagemans the Dutch Association for Sustainable Development and asked for their comments.

With Prof Harry Hummels The Netherlands has an ardent champion for impact investing, he is even nicknamed Mr Impact Investing. He teaches at Maastricht University and previously at Nijenrode Business University. He set up sustainable investing at ING (Paribas) Bank in the Netherlands, which by the way just became diversified financials sector leader in the Dow Jones Sustainability Index. In 2007 he surveyed the largest Dutch charities on their asset management, sustainability and mission related investing. In 2009 he developed the responsible asset management guideline for the Dutch Charity organization VFI which represents the 100 larger fund raising charities 9. In 2011 he started Impact Investment asset management at SNS Bank (recently renamed Actiam) and in 2013 he became European liaison for the Global Impact Investment Network (theGIIN). It is no coincidence that the GIIN has an impressive Dutch participation 10. I am very happy he took the time to look at my impact indicator and will go into his comments on verification first. He characterizes it as a independent impact ranking system for impact investment marketing purposes.

As far as I know nobody came up an instrument like this before. Maybe the French Finansol label for responsible investment products shares some characteristics. Note that the French Responsible or Sustainable investment market is quite advanced and France is European market leader in best-in-class public equity investment. (Eurosif 2012) NAB France 11.

Is it true?
Prof. Hummels points out that as a marketing tool, it's success will come from sincerely applying the different scales system and/or from external sources. Verification would build consumer confidence, but would also be introduced at a price. Business for accountants and consultants...

Sectoral cooperation for consumer information
But I would prefer it if banks, asset managers and impact and sustainability experts cooperate and agree to impact indicator principles. In the same way ten major banks defined the Green Bond Principles to make sure that what the market offers and what they are to underwrite and distribute lives up to expectations and standards 12.

An external organization such as the Climate Bonds Initiative (CBI) can be invited to provide the necessary sectoral guidelines with sectoral experts from (investment) business, governments, NGO's, academia and other relevant fields. As they are doing right now at amazing speed to assure quality green bonds standards for property, transport and mobility etc. And recently for water and sustainable agriculture impact sectors! 13. An other interesting feature of the CBI is that they invite and approve external verifiers. It promotes climate bonds actively and monitors and researches market developments. Recently it published a report on the state of the Green Bond markets 2012-2013 at the request of HSBC 14.It is sponsored by major international banks, the European Climate Foundation and the Sainsbury Trust and partners with many other major banks. 

Leveling impact
Harry Hummels also points at the complications of prioritizing basic needs (sectors) over world wide threats and global threats and these over ESG opportunities. And defining the distinguishing barriers. A tricky aspect and indeed complicated to apply in the present investment market. Frank Wagemans of the Dutch Association of Investors for Sustainable Development (VBDO) appreciated the gradual design, but suggested a simplification of the model by deleting 2 levels as level 4,5, and 6 are not levering impact from their perspective.

First a bit more on the VBDO: it was founded in 1995 and started asking critical questions at stakeholders meetings. It has an unusual structure with thousands of small private sustainable investors and dozens of larger institutional investment managers, banks, asset managers and advisory firms 15. It's focus is on promoting sustainable business practice in companies, sectors and supply chains. It thus undertakes many sustainability benchmarks in the Netherlands and is very active (and successful as active shareholder (engagement, dialog and voting) co-operating with corporations. It is also introducing new sustainability themes in the financial arena such as tax paying by multinationals.
I feel his proposal reflects the VBDO operational strategy and approach. It considers 'impact investment a specific form of sustainable investing' as opposed to my sustainable investing 2.0. Please note the VBDO comments are translated by me.

Frank suggests leaving the lower levels as they are, but adapts the higher levels adding sustainability policies and dialog 16:
Level 0: I just care about financial returns;
Level 1: I do not invest in harmful industries and products;
Level 2: This investment product uses ESG data for better financial assessment;
Level 3: This investment product uses dialog influence sustainability policies and practices;
Level 4: This investment product selects corporations/activities that support and successfully practice sustainability policies (a positive selection approach);
Level 5: This investment product measures and selects projects/corporations on the merit of positive impact on society and aims at enlarging it's impact.

Grading on sustainable business practice
In theory this leveling system makes perfect sense. The paradox that arises is that companies can move up to high impact levels on the basis of their ESG and sustainability policies, dialog with stakeholders, reporting and progress. Which gets them noticed by RobecoSAM and in Dow Jones Sustainability Index. But that does not make their core business sustainable. That can be (soft)drinks, snacks and processed foods that nutritionists and medical staff are hesitant off and recommend sparse consumption. Or they can be fossil fuel producers with sustainable business practices that are not seriously investing in the transition to renewable energy. That it is a dead end road with accumulating negative side effects. It is with this amazement that I look at the Dow Jones Sustainability Index and some of it's super sectors and leaders. They may have sustainable business practices, but that does not make their core business sustainable...

The paradox of the impact indicator model is that it values qualitative impact over quantitative impact. For example a smal scale activity such as a Social Impact Bond or Wakawaka solar lights that provide free healthy safe lightning at night. They get a high impact score and for instance than large scale energy savings by multinationals. Or the Dutch beer brewery Heineken which is considered not sustainable because it produces alcoholic beverages, but it is also champion water savings. And because of it size that means a lot of sweet water is saved.
So what's the paradox? The large size of the savings seems to mean more that a small scale innovative impact investment. But traditional markets and consumption patterns are growing which means the gap between the 'haves' and 'have nots' is growing too. And when it comes to nature and resources they keep using, exhausting and in the worst case wear out completely. And this is where impact investing wants to offer an alternative. Meeting basic needs for a lot more people and accelerating the transition to less consumption, pollution and destruction. This can be achieved through (radical) efficiency and using less harmful resources, but also by investing is less harmful ways of production.

A clarification of the Impact indicator levels
I will clarify the impact indicator levels in more detail, thus hoping this will remove some of Harry's and Franks doubts.

Level 0: 'I just care about financial returns' is the mainstream investment market or almost 90% of the financial markets in the US according to the Sustainable and Responsible Investment Forum (USSIF). According to very recent data in (Western) Europe it is almost 60%, down from 90! is not SRI managed assets according to Eurosif 17.

Level 1: 'I do not invest in harmful industries and products' is a reflection of exclusion strategies. Exclusion to be in compliance with international regulation on cluster and land mines, chemical weapons, nuclear weapons and weaponry unable to distinguish between military, terrorists and civilians. But also Norm-based or Ethical investment which embody mainstream SRI or sustainable investment funds excluding corporations active in the field of AGTAF: Alcohol, Gambling, Tobacco, Adult Entertainment and Firearms. Next to that the broader 'Western-Judeo-Christian' exclusions horizon of corporation associated with nuclear energy, pornography, fur and factory farming (of animals), test animals, lack of supply chain management ...18. There are also Halal or Sharia investment exclusions based on Islamic beliefs. They are comparable to AGTAF exclusions with an interesting addition. They focus on no interest payment and avoiding gambling practices includes investing in options, futures and day trading. From the point of view that Impact Investing is long term investing providing 'patient capital' this approach of Sharia Investment fits impact investing very well 19.
There might be investment strategies based on Buddhism, Hinduism or other world religions but I did not come across then yet.
Addition: Ann Logue describes them in Socially Responsible Investing for Dummies (Keeping the faith: Investing with religious beliefs) offering little guidance. The fact that the Dow Jones Dhama indexes, launched in 2008 embracing Bhuddist, Hindu, Jain and Sikh principles has disappeared probably says more. 

Level 2: 'I care about financial returns and Environment, Social & Governance risks'. This reflects a major existing strategy excluding corporations that pose these risks. Such risks reflect high(er) production costs such as costs due to the (lack of) labor safety (compensation and sick leave) and high turnover (lack of diversity) or companies whose activities rely heavily on (intensive) use of (fossil) energy, (sweet/clean) water and rare or scarce resources. If they do not develop efficiency programmes, alternatives, recycling and or climate change policies their products will become either too expensive or even impossible to make. ESG risk corporations also face penalties and fines for breaking (inter) national laws and regulations and reputation risk and business-to-business and/or consumers boycotts. Think: human rights violations, use of child labor, disrespect of labor and political rights, discrimination, corruption, lack of environmental and or biodiversity protection.
This is an existing category in socially responsible or sustainable investment served by the ESG research sector which offers data on individual corporations, but also sectoral databases with information from internal and external sources on a variety of ESG risks.

Level 3: ''I care about about financial returns and Environment, Social & Governance opportunities''. This level represents corporations that focus on ESG opportunities that directly aim their business process, products and activities. Think Sustainable investment funds marketing themselves as aiming to invest in sustainable ''pioneers'' with various ambitions (Triodos Sustainable Pioneer, KDB KDB SRI Pioneer Asia, GIIRS/pioneers).

One Dutch Bank is completely transparent about it investment universe on sustainability criteria and regularly updates it. It is Triodos bank and you can find it's investment universe of hundreds of stock listed companies on-line 20.
It does not claim their list is complete or that if a company is absent it does not meet their strict investment criteria. Because it is neither feasible nor desirable to investigate all stock listed companies.
Note that they do not claim that these companies pose ESG opportunities but it is my sincere impression that due to their criteria and assessment the companies qualify as ESG opportunities. And thus their universe at least adheres to level 3 and probably higher as well.

Sometimes ESG Research firms open up about their assessment of ESG opportunities, beyond the data that is offered to their paying clients. Sustainalytics, awarded twice as best ESG researcher by it competitors, published '10 Companies to Watch in 2014' in January 2014 focusing on their outlook for the next 12 months. It presented 8 ESG-risk corporations and 2 ESG-opportunity corporations the latter both in the food sector (impact: a basic need). They were Dutch Corbion (previously CSM) and US/Chinese Smithfield Food Inc and Shuanghui International Holdings (mainly meat, so unfortunately with negative impact due tot the ratio of vegetables needed to produce meat) 21. Unfortunately in 2014 Corbion has done very poorly on the stock market.  

Note that I do expect ESG-opportunity investment products developers to exclude ESG-risk as well by pursuing sustainable business practices. An investment in a low income country, for instance an internet company in Africa, should adhere to ESG-standards 22.

By now you are probably thinking: is it actually available?
Corporations activities in this field will never be able to claim more than 50% of the activities to be aimed here. But that doesn't mean it can not be an investment opportunity. A corporation can offer a ESG-opportunity bond as an investment product, just in the way corporate Green, Climate, Social Impact and Developments Bonds have entered the bond markets. And last year at such a speed that they overtook traditional issuers such as international reconstruction and development banks 23.

Level 4: I care about about financial returns and global threats and solutions'' Since level 2 deals with ESG-risks and level 3 with ESG-opportunities what differentiates level 4 from 2? A broader horizon: so not just ESG-risks and opportunities that deal with the company's activities and cost enhancing factors and potential revenue 'stars', but a more long term and wider perspective on global threats and opportunities and where a company is heading. The Economist's columnist Schumpeter recently warned that this kind of sustainability policies, the new green wave, might be costly. But Schumpeter failed to make the connection with green or impact investment and it's cheaper capital advantage 24.

The 4th level is very much inspired by Terry Waghorn and Ken Blanchards 1996 book Mission Possible (McGraw Hill, available at Amazon) where they urge corporations to not just focus on improving the present business processes and models, but constantly think about the next decade and where the corporation wants to be and what they want to be doing. In the Goodreads summary it states: 'how to improve their present organization while simultaneously creating its replacement' 25. Probably it is more about being innovative, than socially responsible, but being an idealist I hope and pray for their activities to have impact. These days Terry Waghorn is a contributor to Forbes.com where he covers the intersection of innovation and sustainability. And he started a new breed investment fund Veratak, which is a spin off of the non profit award giving platform Katerva. That used crowdsourcing to find and evaluate innovative initiatives with up-scaling potential. Veratak focuses on agricultural technology, financial technology, clean technology, life sciences, energy, water, and transportation.

It is not just Terry's mindset, a Dutch asset manager focusing on innovative companies also stresses long term commitments for broader future strategies 26. Planning ten years ahead may seem ambitious in businesses with a quarter earnings reporting mindset. But especially for ESG and sustainability ambitions it is a necessary time frame.

Management consultants McKinsey focused in their 4th Quarterly 2014 on an article in Democracy: A Journal of Ideas by two of their alumni Eric Beinhocker and Nick Hanauer. They stated in their article 'Redefining capitalism' that modern capitalism and prosperity is about creating solutions for societies challenges and making them available for all or at least as many as possible 27.

Again, this level of the impact indicator does not represent a league of corporations or investment products that is easy to find. But fundanalists, investor relations communication and PR departments do share information about opportunities corporations are focusing on. ESG research firms might share insights and/or define new themes and public sources such as the Green Transition Scorecard on private clean/green tech investment offer valuable data on sectors naming corporations as well.

Impact accelerators
It is in this level that impact accelerators appear such as IT solutions, smart data who are maybe not yet applicable in basic needs sectors, but are becoming main suppliers of innovation and smart green technology. I still put them in the lower level to stress that an 'App' that teaches kids about nature preservation or makes people aware of consumption (choices) has less direct impact than products and services in the basic needs sector.

Level 5: ''I care about about financial returns and peoples basic needs'' Impact Investing is and has always been about peoples basic needs: food, drink, shelter, work and income, health care, education, inclusion etc. It is the traditional Mazlov hierarchy of human needs focusing on Physiological needs (food, water, sleep), Safety needs (Personal and Financial security, Health and well-being and a Safety net against accidents, illness and their adverse impacts), Love and belonging and Esteem and Self-actualization. The latter are not easy to buy or invest in, but preserving and promoting the environment, biodiversity and social-cultural heritage come to mind 28.
In Mazlov's pyramid description in Wikipedia I miss shelter and energy for heating and cooked food that are essential in many parts of the worlds. But they translate easily in healthy lightning and warmth sources preferably without fire hazards, but renewable and not emitting smog, carbon dioxide and greenhouse gases. Cultural impact investments could be regarded as self-actualization (and in the Netherlands in the past even had fiscal facilities).

Is level 5 investible?
Yes! (Impact) Investing in water, food, commodities, micro finance or SME's (Small medium Sized Enterprises: the employment engine), financial inclusion, social housing, care realty, regional or (inter)national development, community development, social impact, green bonds, clean tech, alternative energy, social enterprises is already out there. And even better: to spread risk, there are numerous sectoral ETP's (Exchange Traded Products) or investment funds that often have major holdings in the market leaders who often happen to be the sustainability and CRS leaders as well.

There are investment products that are only available to institutional investors or private equity investors, but there is no reason to assume it will stay the latter's prerogative. Give them time to build track records –and for the cynics to cream of the market- and let them offer it publicly in a couple year's time. More Social Enterprise IPO's (Initial Public Offerings) are also on the way. Or IPO's are marketed as impact investment. Alibaba, the Chinese web based business-to-business on-line marketplace, was marketed as an impact investment in The Economist last year. It gives credit to SME (Small Medium Sized Enterprise) companies active on their platform (based on their turnover insights) 29. And as SME's are an important income and employment accelerator, thus Alibaba became a SME financier.

Level 6: 'I want to invest in impact & am willing to give up return without giving up scaling potential'. This is another tribute to the origins of impact investing that for decades valued impact over return. The pioneer third world investor Oikocredit now holds 800milion US$ under management and doesn't pay more than 1,5% return. The additional return is re-invested.

These days impact first investing is often referred to as catalytic impact investment and it refers to building new impact investment area's. Opening up new investment sectors and regions. Think the rolling out of micro finance in financial inclusion (micro mortgage, micro insurance, banking and mobile access...) Or investing in private and rural health care, private education, etc. The Omydiar Network 30 is an excellent example of a catalytic impact investor aiming to open up new investment sectors by building impact investment pipelines. It has published a series of very interesting blogs about their strategy on the Stanford Social Innovation Review website 31.

When does an investment product fit the level?
Applying the impact steps in my perspective allows for leniency as percentual deviations are allowed, but as in promoting the positive. So an investment product can be scaled when at least half the activities fit the impact level description.

This is were my roots betray me, the Dutch are traditionally either ''rekkelijk'' (flexible, pragmatic) or ''precies'' (precise, as in dogmatic). It refers to a 17th century conflict amongst Dutch Protestants resulting in the excommunication of the Remonstranten who do not claim to know the ultimate truth and are considered a very tolerant religious society. The remainign Protestants came op with a dictated confession of faith. These days Dutch society still reflects such traits.
Some Dutch asset managers are 100% exclusionist and do not allow even marginal non-sustainable activities in investment prospects, whilst others accept minor non sustainable activities up to 5%. For instance sustainable asset managers Triodos and ASN Bank are 100% exlusionists, but Double Dividend accepts 5% turnover from certain non sustainable activities 32.

I think the impact indicator would allow an investment product in for instance level 5 if a corporation is active in the field of ESG-opportunities, even if it is still small as long as it has a sincere intention to upscale these activities in the future. Planned marketing budgets would be a nice indicator, but are unfortunately as confidential as Research & Development budget. Sincere intentions should be supported by commitments, impact policies and transparent reporting on Key Performance Indicator progress and alterations. That should build enough trust as opposed to impact washing claims and window dressing of minor activities. Renat Neuberger of the Huffington Post recently warned for an 'additionality' check for green bonds to see if a company is really pursuing new sustainable/impact activities with the funds or mainly marketing it this way 33. He gives a nice checklist. Jed Emerson and Bugg Levine also give a few examples in their book Impact Investing, Transforming how we make money while making a difference' 34.


A peaking impact investment universe?
No, it's a terraced pyramid
Though the impact indicator leveling suggests a peaking shape, it is actually a terraced pyramid with steep peak in the middle. There are at present few(er) opportunities in the higher impact levels, unless corporate green/social, impact and development bonds keep surging as rapidly as they do and become more inclusive for retail investors. In impact investing literature it is often stressed that there is a need for such innovative financial structures 35. But usually this refers guaranteed and unguaranteed debt and the different risk levels accepted by development banks and charities taking on the risk.

It seems easier to me to build investment products with impact for specific activities and thus bonds emissions than equity, company stocks. That is until  social impact enterprises, ETP's and funds start entering the stock markets in large numbers.

Opening up the investment market
As the indicator's level structure implicitly encourages investing in higher impact investment products, I am positive that corporations and (impact) investment enterprises will be encouraged to develop impact bonds. The present surge in the climate or green bond market is very inspiring and expected to accelerate. Green or Climate Bonds are often oversubscribed two and threefold 36.

The addition of green credentials to investment products makes them more attractive for (institutional) investors 37. Resulting in relatively cheap(er) abundant capital to be invested in …. more growth capital for activities with impact. Why do I expect this? Because Harvard and London BS research has shown that sustainable and responsible investment opportunities have done this for sustainable companies. Thus giving them the opportunity to invest in more and more in sustainability and maintain there leading role 38.

So the impact indicator also aims to accelerate the upscaling of impact investing through the development of investment products with impact. That makes the impact investment market attractive for new players. These aims are identical with the successful French Finansol label that aims to build investors trust in socially responsible investment (SRI) products, stimulate the introduction of SRI products and stimulate demand for SRI products 39.
From a marketing point of view I am encouraged that impact investment products will attract new (investors) generations such as the Millennials in the US. They are the generation, born between 1978-2000 that will inherit an unprecedented amount of wealth, estimated at 41trillion US$. They are already earning well, and as Americans plan their own financial retirement. But they value (social) investment power more than their parents, seeing opportunities for private social investing to deal with societal and global shortcomings and are 'natural' impact investors 40.

Conclusion

New and improved
I have argued that an impact indicator for investment products is feasible, as in both possible and practical and that it would give investors an idea of the impact of their investment at a glance. That is reasonably easy to apply because the indicator integrates mainstream systems for Socially Responsible Investment and equity selection criteria on Environment, Social and Governance (ESG) policies. The state of affairs in which responsible investing means 'doing less harm'.
But the impact indicator also looks at investment selection strategies that aim at solutions for peoples basic needs and catalytic fields working on global challenges. The ambition of responsible investing to 'do good'.
This it is also a marketing tool for corporations and developers of (impact) investment products. But not only that it is an effective instrument to attract abundant en cheap(er) capital for activities with (more) impact.
Implementation
For the implementation the recently developed Climate Bonds Initiative model of standardization and external verification can be incorporated. And (big) banks agree on Impact Bond Principles as they did for the Green Bond Principles. Both important steps with market accelerating effect. The Green Bond market is expected to grow with 150% to 100billion US$ in 2015.

Impact accelerator
Last but not least the impact indicator could be and do much more than the 'kitemarking label' for social impact investments the G7 Social Investment Taskforce just appealed for. It accelerates high impact investment products through it's pyramid structure. The higher impact levels clearly show the importance of impact investing for individuals and society at large. 



3 High Sustainability companies significantly outperform their counterparts by 4.8% per annum over the long term” In The impact of corporate sustainability on organization process and performance by Eccles, Ioannou en Serafeim, Harvard Business School, Nov11) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1964011 (pdf, 57 pages) and 'Corporate Social Responsibility and Access to Finance' (2011) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1847085

4 High Sustainability companies significantly outperform their counterparts by 4.8% per annum over the long term” In The impact of corporate sustainability on organization process and performance by Eccles, Ioannou en Serafeim, Harvard Business School, Nov11) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1964011 (pdf, 57 pages) and 'Corporate Social Responsibility and Access to Finance' (2011) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1847085

5 'Socially Responsible Equity' by McKinsey Consultant Alex Hamilton Chan (former MIT) in the Stanford Social Innovation Review The responsible hand overcoming the shortcomings of impact investing. Dutch Review in IINieuws-15maart12 (Academia).

6 From Ideas to Practice, Pilots to Strategy. Practical Solutions and Actionable Insights on How to Do Impact Investing. Industry Agenda December 2013 A report by the World Economic Forum Investors Industries. Chapter 4.3 Incorporating Impact Criteria in Portfolio Construction: From Policy to Implementation page 26. http://www3.weforum.org/docs/WEF_II_SolutionsInsights_ImpactInvesting_Report_2013.pdf





11 NAB France http://www.socialimpactinvestment.org/reports/Investissements-a-impact-social.pdf (pdf, 141 pages recommendation on page 35-36)





16 Frank is doing PhD research on Socially Responsible Investment. Specifically on the influence of shareholders on the social and environmental policies of public companies. At Wageningen University

17 It used to be 90% in Europe till 2013, but the recent Eurosif Report on SRI in Europe 2014 (October 2014 and actually 13 countries) states a guestimate 41% of assets under management in Europe is guided by exclusion strategies. This is mainly caused my the prohibition by law of Cluster Munition and Anti Personnel land mines investments in a number of Western European countries. http://www.eurosif.org/our-work/research/sri/european-sri-study-2014/






25 In the Goodreads summary it states: ''how to improve their present organization while simultaneously creating its replacement''.

26 Ownership Capital is a ''new' asset manager and partly a break away from the ESG team of one of the big Dutch institutional investors PGGM. Alex van der Velden COO summarizes their focus as looking for ''sound business strategies focussing on innovation that are executed in a sustainable, well-governed manner'' in http://www.sri-connect.com/index.php?option=com_content&view=article&id=761:meet--otto-van-buul-principal-ownership-capital&catid=120:meet&Itemid=1271

27 McKinsey.com/insights/redefining_capitalism? The original article is in Capitalism Redefined in Democracy: A Journal of Ideas, Issue 31, winter 2014. Democracyjournal.org/31/capitalism-redefined




31 Priming the pump article series in the Stanford Social Innovation Review website. Theme: Priming the Pump for Impact Investing 5 columns: Sectors not just firms, the Full Investment Continuum, Gaps in the Impact Investing Capital Curve and Do No Harm: Subsidies and Impact Investing.

32 http://www.doubledividend.nl/wp-content/uploads/2014/07/DDEF-Veel-gestelde-vragen-juli-2014.pdf Triodos Bank a Dutch sustainable bank just blacklisted Google for it's (delivery) drone investment in Boston Dynamics. As drone technology is also used for military purposes Triodos Bank has deleted them form their investible universe which by the way is 100% transparant and online available http://blueandgreentomorrow.com/2014/07/17/triodos-bank-divests-from-google-over-arms-link/ Investment universe: http://www.triodos.com/en/investment-management/socially-responsible-investment/sustainable-investment-universe/recent-results/ Another super sustainable Dutch bank also publishes it's Funds holdings online, it is ASN Bank http://www.asnbank.nl/particulier/wat-doen-wij/hoe-vullen-we-duurzaamheid-in/beleggingsfondsen/universum-asn-duurzaam-aandelenfonds.html Courtesy of Piet Sprengers



35 This appeal also refers to guarantees by development finance institutes and trust funds. The Global Impact Investing Network (GIIN) published Catalytic First Loss Capital http://www.thegiin.org/binary-data/RESOURCE/download_file/000/000/552-1.pdf (pdf, 36 pages)

36 Check out the www.Climatebonds.net (e-newsletter) for recent emissions, coupons and other details.

37 Officially not just for instutional investors, but at present the market mainly offers investment product from on average 100.000 US$, so hardly retail investment products.

38 The Impact of Corporate Social Responsibility on Investment Recommendations Ioannis Ioannou London Business School en George Serafeim, Harvard Business School (March 2013) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1507874 (pdf, 34 pages) and 'Corporate Social Responsibility and Access to Finance' (2011) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1847085

39…G8 Social Investment Taskforce final report recommends a kitemark label inspired by the French label Finansol. In the NAB France report Investissement a impact social, page 35-36. “Le Label Finansol répond à ce triple objectif: - Développer la confiance des investisseurs dans les placements solidaires... Favoriser le développement d’une gamme élargie de produits d’épargne solidaire ... Faire progresser le niveau d’exigence des produits d’épargne solidaire afin qu’ils répondent pleinement aux attentes des investisseurs ainsi qu’aux besoins de financement des entreprises solidaires.


40 Read Jed Emerson, and Linsday Norcott's The Millennials Perpective, Understanding Preferences of the New Assets Owners. An ImpactAssets Issue Brief on critical issues in Impact Investing. http://www.impactassets.org/files/ImpactAssets_Issue_Brief_13_Millennial_Perspective.pdf
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