Weekly Review March 21-25


Every week at ID we scan the web for articles and posts about what we do and what we like. This week we read a lot about impact investing.
Morgan Simon emphasizes the importance of measuring investment impact carefully and critically. Organizations like GIIRS are “creating a verifiable standard” and contributing to the professionalization of impact investing. Simon reminds us that not all investments in emerging markets are impact investments. Getting people to invest is not the challenge– it’s getting people to invest with impact. Thankfully, as we’ve stated in our blog post, we think that there is hope in today’s youth and the many social entrepreneurship initiatives that are popping up in universities.
On the flip side of impact investing is divesting in companies that don’t live up to socially responsible standards. That’s just what Harrington Investments, Inc., a California-based “investment advisory firm specializing in socially responsible investing” did this week.  They divested their holding in Chesapeake Energy Corporation, a natural gas producer, “due to the corporation’s poor environment record and its lack of accountability to shareholders.” This makes room for Harrington to reinvest their money elsewhere. We’d suggest investing in alternative energy in emerging markets rather than energy solutions that are quick, cheap, and unsustainable.
Cardenau of Next Billion asks impact investor David Green about his thoughts on the constraints to “’market-based solutions’ for the world’s social ills” and the barriers that social entrepreneurs face. Green points out that “there are few examples of organizations that maximize distribution for social good while being self financing and profitable.” Most companies are profit driven with a little CSR thrown in for good measure or the other extreme, non-profit. Businesses that go “beyond CSR and can be defined as ‘socially transforming’” have social interest at their core values just like non-profits, but seek to exist in the market. Green says that these “socially transforming” organizations need to be their own asset class. They need impact investors and seed-stage financing. At ID, we agree with Green and seek to invest in seed-stage, for-profit social enterprises.
These two articles are present an interesting debate on impact investors’ use of the Capital Asset Pricing Model (CAPM) to assess risk in social valuation. Bowerman argues that impact investors should not use CAPM, while Levin argues that the tool is inherently valuable. CAPM measures beta, which represents non-diversifiable risk, the kind of risk that can’t be avoided in the market. Bowerman argues that beta inaccurately measures risk, and therefore CAPM inaccurately prices assets. Rather, social investors have many other factors to consider because the ultimate value they’re trying to create “cannot be reduced to a spreadsheet.” Levin’s counter argument is that the comprehensive value-risk assessment that CAPM produces articulates “social value to investors, who will continue to speak in dollars, and … [helps] us generate an economy that balances social and financial returns.” Levin’s firm created a modified CAPM especially for social enterprise that uses beta “to calculate the impact on various beneficiaries.” Each side has a fair argument. Read each article and let us know where you stand. Should impact investors embrace CAPM or run from it?