Why the Growth of Impact Investing Depends on Data

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Wharton’s Katherine Klein talks with Harvard’s Shawn Cole and Chicago Booth’s Robert Gertner about the Impact Finance Database.

The numbers prove that the rising popularity of impact investing isn’t just anecdotal. According to an industry report, the size of the market grew by an astonishing 42.4% in the last year — from $502 billion to $715 billion in assets under management. Searching for a way to let their dollars make a difference in the world, a growing number of asset owners and managers have turned to impact investing, which is the deployment of capital to achieve both social and financial gains.

While the business of impact investing is booming, a lack of data has hampered knowledge of how and whether impact investors achieve their goals. That’s why the Wharton Social Impact Initiative has partnered with the Chicago Booth Rustandy Center for Social Sector Innovation and the Harvard Business School Impact Collaboratory to create the Impact Finance Research Consortium. Launched in late October, the consortium will build the Impact Finance Database (IFD) to catalyze groundbreaking research in the field. The IFD will be a repository of information on impact investing funds around the world, with data on key subjects such as financial performance, due diligence practices, investor relations, legal governance, strategy and management.

Katherine Klein, vice dean for the Wharton Social Impact Initiative, invited two of her colleagues to talk about the work the consortium is doing during an episode of the Dollars and Change podcast. Shawn Cole is a finance professor at Harvard Business School, and Robert Gertner is a strategy professor at the University of Chicago’s Booth School of Business. (Listen to the podcast at the top of this page; find more episodes here.)

An edited transcript of the conversation follows.

Katherine Klein: To date, there has not been a lot of academic research on impact investing in private markets. Our three institutions have joined forces to gather systematic data on the goals, management and performance of impact investing funds.  Shawn, what kinds of data are you particularly excited about? And what kinds of questions have drawn you to this collaboration?

Shawn Cole: I think what’s so exciting about this field is that you have such strongly held views on both sides of the spectrum. You have [venture capitalist] Marc Andreessen reportedly saying impact investing “is like a houseboat. It’s not a great house and not a great boat.” On the other hand, you have funds like TPG Rise quickly raising billions of dollars with the promise of achieving both social and financial returns.

Academics are naturally a pretty skeptical bunch. They are very interested in getting systematic data to understand these questions. We have some early evidence about the returns from impact investing using data scraped from public sources. But, it’s very hard to get comprehensive data either at the fund level or at the portfolio company level. I’m very excited about our efforts to work together as a team to build a database that will be useful not just for us, but for academia in general to really understand what are the financial returns of impact investing. What are the risk profiles of these investments? And then to start to make progress on measuring and understanding how these funds and portfolio companies can create impact.

“We figured out an approach where we could collaborate and use the respective strengths of each of our institutions to make this as easy as possible for investors, but also as useful as possible for investors.”  –Shawn Cole

Klein: Rob, can you talk about the kind of academic research and findings that we hope to create, and the questions we hope to answer? How will this work influence practice?

Rob Gertner: I think the academic questions are clearly of great interest and great import. But I also think that the question that Shawn raised, the houseboat analogy, is a very important one. It’s an important one for the field because investors are going to have to think hard about how they choose to invest, about the role that impact ought to have in their investing strategy. For funds and for the whole field to be successful in the long term, a deep understanding of that and transparency about that, and good data to understand how these trade-offs work, are really essential.

I think the field really needs to be able to address these questions, and only with comprehensive data collection and analysis will that really be possible. What’s really exciting about this opportunity is that it allows academics to address these questions, but it also really can play a very important role as this field grows and evolves.

Klein: One of the phrases I like to use in describing our work is that we aspire to be honest brokers in the field. I think that’s important to say because we wouldn’t be doing this research if we weren’t pretty interested in impact investing and the promise of impact investing. We’re not utter skeptics by any means. But as we approach this as researchers, we’re committed to being honest brokers and communicating, “Yes, these claims are accurate. But, these other claims and hopes? We don’t think they’re true.” We are hoping to cut through some of the confusion and the skepticism and the hype that we see around impact investing, with the goal of moving capital and moving solutions.

While there are reports from industry groups and consulting groups, there are a lot of questions that have not yet been answered around, for example, the tremendous diversity we see in impact investing funds, in their size, in their focus, in their experience. We don’t really know what the differences are among these funds. When you talk about mainstream investors that have gotten into impact investing, how does their focus, how does their diligence, how do their financial goals and financial performance compare to earlier and smaller funds? We don’t know. I hope we can answer some of those questions to tease apart the variability in this field.

We’ve spent an awful lot of time creating a survey that we hope is really easy and efficient and interesting for fund managers to answer, so we can learn about how they do due diligence. We want to know what their goals are, what kinds of experiences they have with investors, and to what extent do they find investors are seriously committed to impact. What kinds of investors? We’re also looking at financial documents, legal documents, impact reports.

Cole: This collaboration was born from an industry conference I was at, where folks were saying, “Shawn, we love that you’re interested in doing research on impact investing, but it seems like two dozen other people are. We get a survey request every few weeks, and we just don’t have the time or the capacity to manage all this. You academics need to get your acts together.”

“In order for [impact investing to grow substantially], there needs to be a really deep understanding about the structure, the returns, the way in which it has impact.” –Robert Gertner

Katherine and Rob and I, and [University of Chicago assistant finance professor] Jessica Jeffers, met and had a number of conversations, and we figured out an approach where we could collaborate and use the respective strengths of each of our institutions to make this as easy as possible for investors, but also as useful as possible for investors. We spent a lot of time workshopping the survey and the report with impact investors themselves. We said, “If you participate in this survey, we’d like to return some benchmarking information so you can understand how you compare to your peers, and we can deliver some real value for you as an organization.”

Our research goal is not just to understand these deep questions, but to really understand the practice. What approaches seem to be more effective, seem to be more successful? We can turn this into lessons for industry, into teaching material, and help advance the practice of impact investing.

Klein: I think another piece we need to emphasize is that we’re gathering sensitive, confidential data, and we take that responsibility very, very seriously. As business school professors, we’ve all worked with enormously sensitive data, and that’s something we take very seriously. It allows us to do important and meaningful research. Rob, you wanted to add some points on this effort?

Gertner: Yes, there are a number of ways to think about the way funds will get a lot of value out of this. Although impact investment is growing rapidly, it still remains a fairly small percentage of the investing universe. I think that the opportunity for it to grow a great deal is substantial. In order for that to happen, there needs to be a really deep understanding about the structure, the returns, the way in which it has impact. Having unbiased, relatively complete data is an essential part of making that happen.

The other thing that I think is really interesting here is that, maybe it’s a bit of a caricature, but the structure of impact funds seems to have started out to look very much like traditional funds with just impact added on. As this domain is evolving rapidly, there’s a fair amount of innovation associated with the contracts between general partners and limited partners, the relationships between the fund and the firms it’s investing in. Being able to collect that information and share and understand what’s working well, how impact is managed and how it’s measured — all of those features beyond just financial returns — are really going to be essential for funds and investors to make smart choices as they grow and evolve.

“My aspiration and belief is that the data we’re collecting will change and inform practice, and also be of great value in research and teaching not just in finance, but across many areas of business schools.” –Katherine Klein

Klein: Our business schools have a track record of collecting and analyzing data that changes practice. Rob, can you give some examples?

Gertner: I think the clearest example of this is the Center for Research in Security Prices (CRSP), which was an academic project that led to having this enormous impact on the practice of finance. The systematic collection of securities prices, which is what CRSP did, allowed for the whole field of finance to become more data-driven and empirical. We aspire to something like that kind of impact, even having a small fraction of that kind of impact, in the field of impact investing.

Klein: I think of Wharton Research Data Services as another example of how Wharton makes data available for research on a great range of topics. We’re putting in a lot of sweat equity and personal capital into this new data collection and research effort, but our aspiration is ultimately to share this data set in an anonymized, entirely confidential form. We want to make the anonymized data available to qualified researchers around the world.

You both are finance professors; I’m a professor of management. The management questions that come out when we think about impact investing are compelling. Can you really pursue profit and purpose? How do you do that? What kinds of employees do you need? What talents do they have to pull this off? What reward systems do you put in place to do this? How do you gain a competitive edge through the people you are managing and the cultures you’re building within these impact investing funds? My aspiration and belief is that the data we’re collecting will change and inform practice, and also be of great value in research and teaching not just in finance, but across many areas of business schools.

Cole: We’re seeing the trends that are in impact investing permeate through the entire economy. Public companies, large private companies, debt markets are all starting to focus on impact and purpose and measurement. I think that these data represent a really important laboratory for understanding how these forces might affect business overall.

Klein: Right. We’re already seeing the evolution of how people think about impact. In the last six months, we’ve seen an awakening in this country among many to issues of racial justice, and we’re seeing more and more impact investors and others say, “How do we use finance as a tool for racial justice?”

My sense is it will be awfully interesting to track over the years where impact investors are focusing. Where are they able to achieve impact, and where are they able to achieve financial returns as the priorities for impact evolve over time? I’m excited about that potential as well.

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