How impact can enhance the risk-return equation

Impact investing is a rapidly growing segment within sustainable investing. It aims to channel money toward the companies that have a positive impact on the world in which they operate – and to deliver outperformance for investors in the process.

Eric Rice, Head of Impact Investing within BlackRock Fundamental Equities and Portfolio Manager of the BlackRock Global Impact Fund , hosted a virtual sit-down with Sir Ronald Cohen, the highly regarded “Father of Impact Investing” and author of the new book Impact: Reshaping Capitalism to Drive Real Change. The conversation covered the forces driving impact and how this style of investing is upending the traditional risk/return equation.

Impact investing and the future of capitalism

July 2021 - Companies are increasingly measured not only on how much money they make, but also on the societal impact they are having. Eric Rice, Head of Impact Investing within BlackRock Fundamental Equities, speaks with Sir Ronald Cohen, the highly regarded “Father of Impact Investing,” about how this style of investing is upending the traditional risk/return equation.

Quyen

Welcome to Expert to Expert, a BlackRock Fundamental Equities video series that pairs our investment pros with the business heads, politicians, policymakers and academics who are leaders in their fields and influencers in our global economy.

 

Together they explore the topics that are driving markets and shaping investor decision-making.

 

Our second episode shines a bright light on impact investing, and I’m thrilled to introduce two pioneers and experts in the field.

 

Sir Ronald Cohen is widely recognized as the father of impact investing and European venture capital. He is driving forward the global impact revolution. Sir Ronald serves as chairman for the global steering group for impact investment, the Impact Weighted Accounts Initiative at Harvard Business School, and the Portland Trust. He was born in Egypt and left as a refugee at the age of 11, when his family cam to the United Kingdom. He is the author of Impact: Reshaping Capitalism to Drive Real Change.

 

Eric Rice is head of impact investing at BlackRock. He works as a portfolio manager and is the architect of the world’s first diversified public equity impact investing strategy, Global Impact. Earlier in his career Eric worked as a world bank country economist and a diplomat in Rwanda, with the U.S. Department of State.

 

In Part 1 of their three-part conversation, Sir Ronald and Eric dig into impact investing and the myth of lower returns.

 

Gentlemen, please take it away.

 

Eric

Thanks, Quyen. And hi, Ronnie. It's nice to see you.

 

Sir Ronald

Hi, Eric. Great to see you, too.

 

Eric

So Ronnie, you and I have both spent years as impact investors. And historically, impact investment has lived in a very circumscribed space, focused in the private markets, and only on companies that are dedicated to solving the world's big problems. But now, in your new book, Impact, you write about a broader concept of reimagining capitalism. So what does this idea of reimagining capitalism mean to you? And why is it so important at this moment in history?

Sir Ronald

Great question, Eric. The world is shifting economic paradigms. It's shifting from risk/return to risk/return impact. And the implications of that change are massive because that they will enable us to measure the impacts of companies and to compare not just their profitability, but their impacts, too. And this is informing investment decisions today. But with new information coming on stream, we will be able to compare in great detail the impacts of companies.

 

Eric

You broaden the scope through your work on impact-weighted accounts to that whole economy. Can you tell us a bit about what you would hope to accomplish with that?

 

Sir Ronald

Yeah. Everybody assumes we can't measure impacts. In fact, though, there's a ton of publicly available information which we can use algorithms and big data to analyze and to deliver to investors and other stakeholders. So what the impact-weighted accounts initiative does at Harvard Business School is take the metrics which have been laboriously prepared by some amazing organizations, like SASBI and GRI over the last decade or two, and sort out the most important metrics, and then create pathways to monetizing these metrics so we can reflect employment impact, and product impact, and operational impact on people and the planet through financial accounts.

 

Eric

I love the way you broaden that out to the entire economy, the entire market. For my team, we capture the narrow definition of impact investing. But we broaden the lens in a different way, which is to go from what was private markets to what's public markets, the recognition that if we're going to meet the demands of the United Nations sustainable development goals, it's been calculated that it's about $2.5 trillion a year shortfall for the emerging markets, and then to reach the Paris Climate Accord goals another about the same, $2.5 trillion. So to gets to the $5 trillion extra that's needed, we've looked at this and said, well, impact investing has to go from private markets to public markets. And that's how we've approached it.

 

Sir Ronald

I totally agree. I totally agree with your characterization, Eric. And what we're doing by bringing the transparency on corporate impacts to investors is we're enabling investors now to optimize risk/return and impact, whether they're investing in private asset classes, or in public equities, or in bonds or any other form of investment. So bringing measurement to ESG through ESG impact accounting, if you like, is turning ESG into impact investing, which has the intention to create impact, but also the measurement of the impact created.

 

Eric

It's amazing to me that there's one issue that never seems to die. We hear from our family office clients and from institutional investors still that impact investing, while it sounds great from a philanthropic lens, it leaves out the fiduciary obligation to maximize returns, this view that impact investing necessarily gives up returns.

 

Sir Ronald

So I think this myth is now being exploded, Eric. There’s a lot of-- there are a lot of reasons why risk/return impact should deliver better returns than just risk/return optimization.

 

Eric

I agree. It's funny. Some years ago, we used to think about this. And it wasn't tested yet. We could say, theoretically, wouldn't you rather invest in these long runways of unmet needs, whether social or environmental? Or would you rather invest in the incumbents who are struggling to stay in the same place or who are struggling with stranded assets?

 

But now, we've had a chance to test it. Now, we can see what the returns look like over quite a number of years. And at least from our view, they're very good. I don't know what you have seen from your perspective.

 

Sir Ronald

So I see the same thing. I see risk/return impact as a better way to do business and to invest today. You have to be crazy today to invest in a company with a good product, but which is creating huge environmental harm and using child labor, as an example because it's becoming clear that, with the changing values and the influence of policy makers that these changing values are having, these companies are going to be regulated and taxed. So the world has already started to shift.

 

Quyen

Sir Ronald and Eric discussed important issues about investing with impact.

 

The key takeaway, in my view, aligns with the message from BlackRock CEO Larry Fink. “The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”

 

We hope you’ll tune into Part 2 of our impact series where Sir Ronald and Eric focus on the three forces driving change.

 

Risks

 

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

 

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

 

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

 

Important information
Until 31 December 2020, issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

 

From 1 January 2021, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Economic Area, the issuer of this material is:

 

(i) BlackRock Investment Management (UK) Limited for all outside of the European Economic Area; and

(ii) BlackRock (Netherlands) B.V. for in the European Economic Area

BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

 

For qualified investors in Switzerland: This document is marketing material. Until 31 December 2021, this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (CISA), as amended. From 1 January 2022, this document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services (FinSA). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa

 

For investors in Israel: BlackRock Investment Management (UK) Limited is not licenced under Israel's Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law), nor does it carry insurance thereunder.

 

South Africa
Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

 

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

 

© 2021 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

FOR MORE INFORMATION: blackrock.com

AEH0821E/S-1743052

Quyen

Welcome to Expert to Expert, a BlackRock Fundamental Equities video series that pairs our investment pros with the business heads, politicians, policymakers and academics who are leaders in their fields and influencers in our global economy.

 

Together they explore the topics that are driving markets and shaping investor decision-making.

 

Our second episode shines a bright light on impact investing, and I’m thrilled to introduce two pioneers and experts in the field.

 

Sir Ronald Cohen is widely recognized as the father of impact investing and European venture capital. He is driving forward the global impact revolution. Sir Ronald serves as chairman for the global steering group for impact investment, the Impact Weighted Accounts Initiative at Harvard Business School, and the Portland Trust. He was born in Egypt and left as a refugee at the age of 11, when his family cam to the United Kingdom. He is the author of Impact: Reshaping Capitalism to Drive Real Change.

 

Eric Rice is head of impact investing at BlackRock. He works as a portfolio manager and is the architect of the world’s first diversified public equity impact investing strategy, Global Impact. Earlier in his career Eric worked as a world bank country economist and a diplomat in Rwanda, with the U.S. Department of State.

 

In Part 1 of their three-part conversation, Sir Ronald and Eric dig into impact investing and the myth of lower returns.

 

Gentlemen, please take it away.

 

Eric

Thanks, Quyen. And hi, Ronnie. It's nice to see you.

 

Sir Ronald

Hi, Eric. Great to see you, too.

 

Eric

So Ronnie, you and I have both spent years as impact investors. And historically, impact investment has lived in a very circumscribed space, focused in the private markets, and only on companies that are dedicated to solving the world's big problems. But now, in your new book, Impact, you write about a broader concept of reimagining capitalism. So what does this idea of reimagining capitalism mean to you? And why is it so important at this moment in history?

Sir Ronald

Great question, Eric. The world is shifting economic paradigms. It's shifting from risk/return to risk/return impact. And the implications of that change are massive because that they will enable us to measure the impacts of companies and to compare not just their profitability, but their impacts, too. And this is informing investment decisions today. But with new information coming on stream, we will be able to compare in great detail the impacts of companies.

 

Eric

You broaden the scope through your work on impact-weighted accounts to that whole economy. Can you tell us a bit about what you would hope to accomplish with that?

 

Sir Ronald

Yeah. Everybody assumes we can't measure impacts. In fact, though, there's a ton of publicly available information which we can use algorithms and big data to analyze and to deliver to investors and other stakeholders. So what the impact-weighted accounts initiative does at Harvard Business School is take the metrics which have been laboriously prepared by some amazing organizations, like SASBI and GRI over the last decade or two, and sort out the most important metrics, and then create pathways to monetizing these metrics so we can reflect employment impact, and product impact, and operational impact on people and the planet through financial accounts.

 

Eric

I love the way you broaden that out to the entire economy, the entire market. For my team, we capture the narrow definition of impact investing. But we broaden the lens in a different way, which is to go from what was private markets to what's public markets, the recognition that if we're going to meet the demands of the United Nations sustainable development goals, it's been calculated that it's about $2.5 trillion a year shortfall for the emerging markets, and then to reach the Paris Climate Accord goals another about the same, $2.5 trillion. So to gets to the $5 trillion extra that's needed, we've looked at this and said, well, impact investing has to go from private markets to public markets. And that's how we've approached it.

 

Sir Ronald

I totally agree. I totally agree with your characterization, Eric. And what we're doing by bringing the transparency on corporate impacts to investors is we're enabling investors now to optimize risk/return and impact, whether they're investing in private asset classes, or in public equities, or in bonds or any other form of investment. So bringing measurement to ESG through ESG impact accounting, if you like, is turning ESG into impact investing, which has the intention to create impact, but also the measurement of the impact created.

 

Eric

It's amazing to me that there's one issue that never seems to die. We hear from our family office clients and from institutional investors still that impact investing, while it sounds great from a philanthropic lens, it leaves out the fiduciary obligation to maximize returns, this view that impact investing necessarily gives up returns.

 

Sir Ronald

So I think this myth is now being exploded, Eric. There’s a lot of-- there are a lot of reasons why risk/return impact should deliver better returns than just risk/return optimization.

 

Eric

I agree. It's funny. Some years ago, we used to think about this. And it wasn't tested yet. We could say, theoretically, wouldn't you rather invest in these long runways of unmet needs, whether social or environmental? Or would you rather invest in the incumbents who are struggling to stay in the same place or who are struggling with stranded assets?

 

But now, we've had a chance to test it. Now, we can see what the returns look like over quite a number of years. And at least from our view, they're very good. I don't know what you have seen from your perspective.

 

Sir Ronald

So I see the same thing. I see risk/return impact as a better way to do business and to invest today. You have to be crazy today to invest in a company with a good product, but which is creating huge environmental harm and using child labor, as an example because it's becoming clear that, with the changing values and the influence of policy makers that these changing values are having, these companies are going to be regulated and taxed. So the world has already started to shift.

 

Quyen

Sir Ronald and Eric discussed important issues about investing with impact.

 

The key takeaway, in my view, aligns with the message from BlackRock CEO Larry Fink. “The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”

 

We hope you’ll tune into Part 2 of our impact series where Sir Ronald and Eric focus on the three forces driving change.

 

Risks

 

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

 

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

 

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

 

Important information
Until 31 December 2020, issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

 

From 1 January 2021, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Economic Area, the issuer of this material is:

 

(i) BlackRock Investment Management (UK) Limited for all outside of the European Economic Area; and

(ii) BlackRock (Netherlands) B.V. for in the European Economic Area

BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

 

For qualified investors in Switzerland: This document is marketing material. Until 31 December 2021, this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (CISA), as amended. From 1 January 2022, this document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services (FinSA). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa

 

For investors in Israel: BlackRock Investment Management (UK) Limited is not licenced under Israel's Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law), nor does it carry insurance thereunder.

 

South Africa
Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

 

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

 

© 2021 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

FOR MORE INFORMATION: blackrock.com

AEH0821E/S-1743052

The new math

A major shift is underway as companies are increasingly measured not only on how much money they make, but also on the societal impact they are having. Rather than judging by risk and return alone, investors are looking at risk, return and impact. Two examples: measuring companies by the impact they are having towards the achievement of the 17 United Nations Sustainable Development Goals, and measuring the impact they have on the progress towards the Paris Climate Agreement to limit global warming to well below 2 degrees Celsius. Mr. Rice says an extra $5 trillion of investment is needed to achieve these two goals – and that public market participation will be critical in achieving it.

The myth of lower returns

One narrative that never seems to die – according to Mr. Rice – is that this is a philanthropic mode of investing that neglects the fiduciary obligation to maximise returns. “This myth is now being exploded,” says Sir Ronald, noting that some electric vehicle companies are attracting lofty valuations, while some big oil companies have lost significant value over the past few years. “There are a lot of reasons why risk/return/impact should deliver better returns than just risk/return optimization.” For example, a company with a great product that does environmental harm, or uses child labour, could face consumer boycotts and sterner regulations, weighing on profitability.

Bringing measurement to ESG … is turning ESG into impact investing.

Sir Ronald Cohen

Three forces driving change

Sir Ronald, who is also featured in BlackRock’s Global Impact Annual Report, has been an impact investor for decades. But now, he says, there are three forces driving rapid change. These are:

  • The shifting values of consumers
  • Technological innovation such as machine learning
  • The ability to harness computing power to analyse vast data sets and measure the impact of companies.

“When you put these three things together,” he says, “you can see that this is going to have a huge disruptive effect on the business models of companies and on the portfolios of investors.”

Many companies are embracing this change in a “race to the top.” And where there is some resistance, investors can engage with companies to drive change.

“I think investors are certainly the ones driving companies now to look carefully at their impacts and judge whether their impact performance is likely to affect their future profitability,” says Sir Ronald. Mr Rice agrees: “I think impact engagement ― real engagement with those public companies to make sure they know what's going to be required of them ― is an important new stage for us.”

The future of impact investing

Sir Ronald sees this now-voluntary company embrace of impact measurement becoming mandatory over the next three to five years. Bringing impact transparency to public equities would be a game changer, he says, as companies are required to show the impact they are having on the environment, diversity, gender equality and other social problems. Companies may have to publish transition plans or risk losing investors. They may also struggle to attract customers and talent, as BlackRock CEO Larry Fink emphasised in his annual letter.

This impact revolution is going to be as widespread and as deep as the tech revolution which has preceded it.

Sir Ronald Cohen

The two believe this has significant implications for the nature of portfolios – and it already be seen with the rotation towards clean energy. Investors may expect a further shift toward companies delivering both profit and positive impact.