Moving from a***hole investing to investing

Daniel Madhavan, the CEO of Impact Investment Group, shares three things he doesn’t like about setting an allocation for impact investment and why it’s useless to put “impact” into a single unified bucket of delicious goodness.

I don’t even know how to spell a***hole. Is it “ss” or “rse”? I’ll come back to why that’s important. In the meantime… 

I often get to discuss impact investing with foundations and philanthropic groups, and often they ask “should we set an ‘allocation’ for impact investment?” (For all of the non-finance types reading this – ie the normal people – an “allocation” in your investment portfolio is just a percentage of the portfolio you have set aside for a specific purpose). 

Let’s say you have a portfolio of $1 million and you set aside a 10 per cent allocation for impact investment. You have now committed to investing $100,000 in stuff that supports positive impact. That’s awesome. 

You might have guessed that my general response is very positive. But, after giving impact investing allocations a massive loving hug in front of you… I am now going to turn ninja assassin on my own answer and share three things I don’t like about that approach. 

1. An “allocation” for impact investing is just an arbitrary, made up, artificial, plastic, make-believe number. Impact investing is not a thing you can invest in. Impact is a lens that you apply to how you invest. So why pick 10 per cent or 20 per cent? Are you saying “I’m going to care about the outcomes with 10 per cent of my portfolio but not care with the other 90 per cent?” Either do it or don’t do it. Also, there are so many different investments with positive impacts to choose from that it’s kind of useless to put “impact” into a single unified bucket of delicious goodness.
   
2. The other reason I don’t like the allocation approach is the same reason I don’t like the term “impact investing” in the first place. Yes, I understand this is a paradoxical statement coming from the CEO of Impact Investment Group and the former CEO of Impact Investing Australia. Hang in there people, let me explain. The challenge I have with naming something impact investing, or free range eggs, or fair trade coffee is that it cedes the idea that this good thing is the normal thing. When I invest, eat an egg or drink coffee, should I not expect that to happen responsibly, protecting people and the planet? By carving out a sub-category, we put the onus for proving goodness on the person trying to do the positive thing. And that normally comes with a cost. I think that sucks and it’s an upside down world. Where these things aren’t done responsibly, I think the manufacturer should have to label them a***hole. So we end up with eggs and a***hole eggs, coffee and a***hole coffee and of course investing (the awesome type which is now just normal awesomeness) and a***hole investing (attributing this term to Venetia in my team, who normally doesn’t have such a potty mouth). That makes more sense to me.
3. Lastly, the biggest issue is that outrageously high standards get applied to finding the perfect impact investment for that allocation; meanwhile those dollars are sitting in shares of a company that’s abusing human rights, or pumping greenhouse gases into the atmosphere, or profiting from problem gambling.

It’s kind of like throwing rocks at someone while you decide what to buy them for their birthday. You really want to take time to get them something amazing, so you spend a long time throwing rocks until you really nail the gift idea.

Was that a little unclear? Let me walk you through it. Often a foundation might decide to “allocate” 10 per cent of their portfolio to impact investing. Then they get super tied up wanting to perfectly align this 10 per cent allocation to their mission. This is a cool and noble thing to attempt, but it often misses an important fact. The 10 per cent is currently invested in stuff that doesn’t further the mission but is also doing terrible things! So although the “allocation” intention is great, maybe just start by being “better” instead of setting the bar at “perfect” ie stop throwing rocks as your buddy whilst you get the gift idea right, trust me, they will thank you!

So, following a long rant on unified buckets, free range egg certification and rock throwing I still come back to my first answer. Impact investing is awesome. 

If you’re a foundation you should absolutely be an impact investor. The money you manage and invest is there for the public good, so extract every last good out of it you can. Do it in the way you grant and the way you invest. 

If setting aside an allocation is the way to get started, then do that. Don’t let me discourage you because that is definitely not my intention. I just want to throw up a few other things I think are worth considering as we move away from a***hole investing towards investing.