Chicago Booth Review Podcast What Do We Get Wrong About Impact Investing?

Priya Parrish: The difference is, and I would say this is a more evolved version of lobbying, which is actually out in the open. There's no secrets. It's corporations actually creating impact reports that say, "This is what we stand for and this is where our money is going," versus all being done in the back door for no one to see. This is about transparency. This is capitalism at its best.

Hal Weitzman: Impact investing is growing fast. The trend which pursues both social and environmental goals, as well as financial returns, now accounts for more than $1 trillion under management and is expected to continue growing at double-digit rates annually for the next decade, according to the Global Impact Investing Network. Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking insights in a clear and straightforward way. I'm Hal Weitzman, and in this episode we're hearing from Priya Parrish, an Adjunct Assistant Professor of Strategy and Impact Investor in Residence at Chicago Booth. Parrish is the Chief Investment Officer at Impact Engine, a venture capital and private equity firm, and she's the author of the new book, The Little Book of Impact Investing: Aligning Profit and Purpose To Change the World.

Impact investing has attracted quite a backlash, with activists such as Robbie Starbuck successfully pushing companies such as Ford, Lowe's, Harley Davidson and John Deere to cut back on the commitment to diversity and inclusion that they adopted in recent years. To its sternest critics, impact investing is a form of woke capitalism that pushes the idea that companies should make decisions based on their social impact rather than on profitability. So what do impact investors such as Parrish think that the critics get wrong? Priya Parrish, welcome to the Chicago Booth Review Podcast.

Priya Parrish: Thank you. Thanks for having me.

Hal Weitzman: Great to have you. And you've written this fantastic book, Little Book of Impact Investing: Aligning Profit and Purpose to Change the World. So let's talk about it. Let's start with the basics. What exactly is impact investing?

Priya Parrish: A lot of definitions floating around there and investors can have their own objectives, but the very core, commonly accepted definition is an investment strategy with an intentional objective to generate some type of social or environmental impact and some type of financial return. And so some of the key things there is that it has to be intentional. There has to be a strategy, an actual plan to do it, and the investor has to play some explicit role in helping to create both the impact and the financial return. What's not in the definition and on purpose is what type of impact and how much, and also what amount of financial return? And so it's an umbrella definition and there are many different types of strategies and approaches to doing this, but anything that meets this basic criteria, I would certainly call it impact investment.

Hal Weitzman: Okay, but it does raise the story. We're at the University of Chicago-

Priya Parrish: Yes.

Hal Weitzman: So we cannot just move on from having a definition. I got to challenge you a little bit. The social impact part of it, that's pretty vague, isn't it? So is there any sense that some social impact, I'm guessing... For example, anybody can say they're helping people. Right? You could work at JPMorgan and say, "I'm helping people," and you are in a way. You work at a private equity firm. You're still helping people in some way. So how do we distinguish between helping people in the way that companies do all the time and social impact?

Priya Parrish: Sure, and we're going to put two hats on. One is the company or the investment fund trying to create the stated impact, and the other is the investor choosing to invest. So let's start with the company or the investment fund. Their job is to specify what the impact is. If it is jobs, if it is reducing wealth inequality, if it is reducing disparities in health outcomes, if it is mitigating greenhouse gas emissions, that is their job to be explicit and not just say, "Impact," at large. Right? And the investor's job, just like they have all the different choices and objectives they have put impact aside, they can also be specific. Maybe it's a Catholic investor, that they want to create impact in a way that is aligned with Catholic values. Maybe it is a conservation fund and it has to do with the planet, and it's about matchmaking. And that's actually always true of investors.

Even the term, "Well, what kind of financial return?" For some people and for some amount of risk, a 2% return is great, and for some investment strategies which take more risk or more illiquid, that's not going to cut it. That would be considered a low return. You're expecting a 20%, 30% return. And so in many ways, it's not that different than financial investing in objectives. It is about being specific, and then having a plan to meet it.

Hal Weitzman: Okay, but just in terms of just what impact investing-

Priya Parrish: It's in the eye of the beholder, 100%.

Hal Weitzman: Right, absolutely. And so it sounds like there's lots and lots of different things you could do under the term impact investing.

Priya Parrish: That's right.

Hal Weitzman: We'll get to that-

Priya Parrish: Yes.

Hal Weitzman: But maybe that's a bit of a problem. But for the moment, there's a whole massive-

Priya Parrish: That's right.

Hal Weitzman: Huge diner menu of options and you can pick and choose what you like, both in terms of the financial goals you're talking about, and in terms of the impact goals.

Priya Parrish: That's right.

Hal Weitzman: So you raised there the issue, and we'll get into it a little bit more about the issue of religion, but you talked about Roman Catholicism, and maybe you have a Roman Catholic investment or whatever. That suggests that there's something different between impact investing, which could be about a bigger social goal, and ESG, which is environmental, social... Really, what we think of as green type investing. Right? And you referred to it yourself, and that's a lot of what people think of as impact investing. So is there a distinction there? What is that distinction between ESG or environmental green investing and impact investing?

Priya Parrish: There's a very clear distinction. So ESG investing is about considering incorporating information or data around how a company is managing their impact on the environment, on their employees, their customers, the community. It stops short of saying there is an objective to create or generate an impact in any of those areas. Impact investors are saying, "We are investing, it is part of the reason we are investing." And when you invest with an ESG lens, it is to say, "I want to include all this information, but it's not necessarily the reason I'm investing." And so in many ways, the question you asked about, "Well, isn't there a whole menu of impact?" Yes, there is. And an ESG, it's a little bit different in that it's also quite wide-ranging. It even includes the G is governance, but it's actually, as an ESG investor, you're actually trying to incorporate all of it versus pick, "This is the thing that matters."

And it's almost gotten to a point in 2024 where a lot of people even wonder, "Isn't this just good investing?" And the answer is yes, but if you rewind even 10 years ago, people thought this was outrageous. Why should an investor think about this data? And now it's so obvious that if you're not managing your impact, it can create significant liabilities and it can create significant opportunity if you're doing it right, everything from the retention and attraction of talent, to your customers and brand loyalty, to liabilities and risks around climate exposure. Obviously, it should be included because it is financially material. And so that's the difference, really your objective versus your consideration of this important information.

Hal Weitzman: I see. So it's almost as if the ESG is measuring the byproduct of the thing that you're actually doing, which is creating revenue or whatever else the key objective of the business is, whereas the other one says, "One of our objectives is that."

Priya Parrish: Yes.

Hal Weitzman: "And the other objective is having this social impact." So it's this twin goal [inaudible 00:08:20].

Priya Parrish: They're very much twins.

Hal Weitzman: Yeah, but it's the twin goals that makes impact investing different from ESG-

Priya Parrish: That's right.

Hal Weitzman: And the way you describe it. All right, so the first part of your book, Priya, is debunking all these myths that people have. And I admit, maybe I've even shared some of these myths myself about impact investing. So if it's okay with you, let's go through them one by one because it's fascinating to think about what we get wrong about impact investing. So let's start with this. Impact investing won't make you money and you're always going to have to sacrifice returns to do good. In other words, there's always a trade-off between those twin goals of making money and doing good. Why is that a myth?

Priya Parrish: It's a myth first of all, because there is enough data and examples out there showing that you can very much have an explicit impact goal and compete financially against investors and investments in companies that don't have that impact goal. So just look at the data. There are venture funds, there are public equity funds, there are endowments, foundations who have been doing this for many, many years, and we're starting to have more aggregate data to prove that.

The second reason is when you actually look at the underlying fundamentals of what drives a financial return, you can start to see that there are ways in which impact can actually improve that. And I have a whole chapter in the book about that, about how impact can drive returns. But as I had just mentioned here, and just to extract it a little bit more, imagine a company who really is essentially solving for an unmet need. There's a lot of demand. There's a business for that. So let's look in the aggregate. So many large companies have made set objectives and goals around carbon neutrality. How are they going to achieve that? They have to change their manufacturing process. They have to change their supply chain, their distribution. That's a demand driver. They have to go find partners, suppliers, et cetera, who can meet this. That's demand, that's money.

So if you have a product or service that can actually achieve those businesses' goals around carbon neutrality and it's a healthy margin, you're going to make money. And that's just one example. You can look in the healthcare sector, you can look in the education sector, you can look in pretty much every sector and think about impact investors and impact companies as just solving for market failures, things that have not been commercially available at that price point or that effectiveness yet, but there is a need.

Hal Weitzman: Okay. I feel like we might have to come back to that, but let's move on because you've got so many of these myths and I want to make sure we get through them. So the second myth, impact investing is just a marketing scheme that investment firms use to look good. So this is what we were getting at earlier, that anything can be impact investing. So if anything and everything can be impact investing, then every hedge fund and venture fund and vulture fund and everything else could say, "What we're doing is impact investing. We're helping someone, ultimately."

Priya Parrish: Yeah. So the truth in this and where the myth comes from is that many people do use it for marketing and many people do use it opportunistically.

Hal Weitzman: Aha. So it's not completely a myth.

Priya Parrish: But they're baseless. And so I think it is up to the investor to actually ask the question. It's just like anyone coming to you and saying, "I can generate the best return ever," and you never asking them, "How?" And so impact is the same thing. We have the industry, investment industry and investment professionals are only beginning to be educated enough to push back when X, Y, Z fund says, "I'm doing great for the world. Look at me. I've been doing this for 50 years and I have billions of dollars and yet this is the first time I'm talking about it," that you can ask them, "Well, tell me how did you do that and show me the proof points that it happened?" It's not regulated. Right?

Hal Weitzman: But that's the problem, isn't it?

Priya Parrish: Yes.

Hal Weitzman: It's not regulated, it's not standardized. And we'll get to the question of measurement in a second, but it does occur to me that there isn't any company on Wall Street that couldn't put out a glossy report saying, "Look at the social impacts that we have," and maybe set up their own impact investing fund and say for example, "We're lending to small businesses," or, "We're improving family-owned businesses." And lots of private equity firms could say that, and maybe they're not wrong, but you wouldn't traditionally think of that as impact investing. So everybody could say they're impact investing.

Priya Parrish: That's actually right. And I think that's where there's this... We're nascent in this and we're going to get to a point, I think fairly quickly, where the question is not are you an impact fund or not an impact fund? You ask every investor, "What is your impact?" Just like you ask every investor, "What is your return goal? How do you manage risk?" There is impact coming from everything. The question is, do we have the infrastructure and tools and data yet to understand it, and to then make decisions upon it? And the liabilities are starting to be exposed. Even looking at companies like, Allbirds I think became quite popular and there was a lot of talk about the sustainability of those shoes, as well as where the products were coming from. And there was a class-action lawsuit about some of those claims not being totally validated. So it will not take long for people to start and companies to start having to be more careful and honest about their claims.

Hal Weitzman: But right now, we are in a bit of a Wild West, are we?

Priya Parrish: Yes, we are. And that is actually where I think as a professional investor for the past 20 years, when there is inefficiency, that is where there's alpha.

Hal Weitzman: If you're enjoying this podcast, there's another University of Chicago Podcast Network show that you should check out. It's called Capitalisn't. Capitalisn't uses the latest economic thinking to zero in on the ways that capitalism is and more often isn't working today. From the morality of a wealth tax to how to reboot healthcare, to who really benefits from ESG, Capitalisn't clearly explains how capitalism could go wrong and what we can do about it. Listen to Capitalisn't, part of the University of Chicago Podcast Network.

So Priya, we were going through the myths of impact investing that you talk about in your book, Little Book of Impact Investing. So let's go to the third myth, which is that impact investing feeds woke capitalism, this idea that companies should have political and social goals. And so you are feeding into that. And many people feel that woke capitalism is a distraction from what companies should actually be doing, which is making money and returning profits to their shareholders.

Priya Parrish: The myth here is that capitalism is not already a system in which corporations have some influence and voice in things that relate to not just their profit generation. Look at how much money is spent by corporations lobbying. Look at these industries and their influence over legislation and politics. That has always been the case. And so to me, this is just a term that has been created and used to push back against certain views, particularly around diversity and things that more traditionally fall under ESG. Although like I said, I think ESG incorporates a lot. It's not a political thing at all. These are just financially material facts, but it was a way to really hijack this idea and say there's a political agenda here and corporations have never had a political agenda. I just have to call that out.

Hal Weitzman: Well, isn't the argument that yes, of course you are, right? Companies have been lobbying government since the dawn of time, but they've typically been lobbying on financial things like they want lower taxes or they want breaks for certain kinds of investments or whatever. The difference now seems to be that they're getting involved in things that aren't really their core business. Right? So I'm just making the case.

Priya Parrish: Yeah. Well, I would argue that corporations have been lobbying for things that relate to their profit motivation, but have a huge impact on society and communities in the planet, and this is no different. The difference is, and I would say this is a more evolved version of lobbying, which is actually out in the open. There's no secrets. It's corporations actually creating impact reports that say, "This is what we stand for and this is where our money is going," versus all being done in the back door for no one to see. This is about transparency. This is capitalism at its best.

Hal Weitzman: Okay, let's move on to the next myth because we've got so many to get through. So this is our fourth myth now, impact investing displaces philanthropy and non-profit giving and activity. So some of this money that is going into impact investing, I guess the accusation is, would've gone traditionally to philanthropy. Let's bear in mind that the traditional approach to investing would be you invest and make as much money as you can, investing in whatever unethical or legal, but unethical or dirty companies you want to, as long as they produce the best returns. And then you take those profits and you can spend them on whatever causes you like.

Priya Parrish: Yep.

Hal Weitzman: So that's the philanthropic model. So the accusation is you're displacing that.

Priya Parrish: So here are three reasons why that's not true. The first is there are countless causes and charitable needs there that do not create a positive financial return. And remember, the original definition, there has to be a positive financial return. It doesn't need to be maximizing, it needs to be one. And so there's lots of things impact investors don't do, and philanthropy and non-profits continue to do. We're partners to them. We're solving some of the same issues, but investing in things that are different. And there are a number of things that fundamentally can't be profitable and that will continue.

The second reason is if you actually look at the data, the dollars going into impact investing, and it's one of the fastest growing investment strategies. It is not coming from philanthropy. It is coming from the bigger pools of capital and the investable dollars, for-profit dollars, they dwarf philanthropy dollars. It dwarfs it. It's not coming from philanthropy. It just factually is not.

And number three reason that we're actually all in this together is we can't forget, as great as philanthropy is, the reason philanthropy exists, it is a symptom, is just how inefficient this system is. Why are we creating so many problems that the government and philanthropists have to clean up? How about we not create them in the first place? And I think philanthropists would love to not have to go use those dollars to clean it up, and they would much rather invest in a way that minimizes that. So I think we're all working together.

Hal Weitzman: Okay, let's move on because we have more myths. So here's myth number... What are we up to? One, two, three, four, five. Okay, here's a good one. Impact investing is not measurable. There's no standard, and we hinted at this earlier. There's no standard to what impact means. It's not regulated, it's not standardized. So companies can say they're having an impact and it's really hard to gauge whether that's accurate or not.

Priya Parrish: There's no one metric like an IRR or a multiple on investment capital. There's no standard metric, but there are standard methodologies. They take more words to explain, but the reason there's no singular metric is because the type of impact is different. So if you are a company focused on carbon capture, it's a completely different metric than if you're a company focused on early childhood literacy. And one metric would actually not tell the story of either. And so there's lots of standardization going on. It's just not the simplest to understand. And by the way, that's the exact same thing with philanthropy and non-profits. There's also not one metric. So this is the financial world trying to pretend that we can standardize everything when we can't, but there's a lot going on there.

And at the same time, I think it is important, and I think smart impact investors know this, is that we can't let the measurement become an administrative burden, and there's privacy issues. So there's cost, there's privacy. There are all these things that we can't measure forever and ever and every little detail because it would actually take away from the impact that's happening. But there is a fair amount of standardization going on out there.

Hal Weitzman: Okay. But it does raise the question for an outsider, how are you going to judge? One company says, "We have impact doing this." Another company says, "We have impact doing that." And they're completely different measures doing completely different things. As an investor, how do you judge whether one is more impactful than the other?

Priya Parrish: Well, that's the investor's job. That's why I get paid, but also, the industry is evolving similar to the way the standard investment industry has evolved, where there are verification firms out there. So almost like an audit.

Hal Weitzman: Right.

Priya Parrish: Right? Like GAAP accounting. They're not telling you whether your numbers are good. They're telling you whether you followed GAAP accounting. And so similarly in the impact measurement world, we're evolving to a place where there's going to be stamps of approval that they followed the practice like this is standard methodology and you can believe it. So we're getting there.

Hal Weitzman: Okay. All right. We're on our way and we are on our way with these myths. We're on number six now. Impact investing is a fad, real investors don't care about. This is something that's only for retail investors, not for serious traders.

Priya Parrish: Again, we can just look at the numbers. It's one of the fastest growing investment strategies. It's everything from large endowments like the Ford Foundation, one of the largest foundations in the world, to some of the largest family offices, even pensions, retail investors. It's hard to find... Even if you look at the top 10 global asset management firms, they all have some kind of impact investment strategy they're offering, and the demand does not seem to be stopping. Even in a market environment which has been trickier for professional investors and firms to grow.

Hal Weitzman: What's happening to the pace of growth?

Priya Parrish: It continues to increase. The pace continues to increase.

Hal Weitzman: Okay.

Priya Parrish: And it's more investors coming in, more and more investors doing it for the first time, as well as existing investors saying, "Oh, I did it and it worked. Let me do more." So the numbers actually speak for themselves.

Hal Weitzman: And what is the pace of growth right now in the industry? Do you know?

Priya Parrish: That is hard to pinpoint because there are different studies, but I would say generally, what I've seen is you could probably look at a mid to high teens CAGR growth continuously. At some point, it will plateau. Right? I don't think that every investor will make 100% of their portfolio have an impact objective. I don't think we're going to reach that point, but it continues to grow and become a very dominant and notable portion of the professional investment world.

Hal Weitzman: Okay. So that answers the next myth, myth number seven, which is impact investing is only for... It's a niche. It's only for, let's say, liberals, religious people, the young and idealistic. Who are the impact investors now?

Priya Parrish: Yeah, I think that's, again... I don't know why this has been portrayed that way, but I can say is Impact Engine, we've been around since 2012. We manage about $250 million in assets under management. Many of my peers manage more or less, and I can't see into their investor portfolio, but I can tell you, my clients, they range in age, they range in politics, they range in values, they range in views. And I think one of the reasons for that is that there are plenty of social and environmental issues that we can all agree are worth solving, and we can prove that are profitable to solve. And so we try to focus on those things in the center of the Venn diagram that we can all agree that improving health outcomes is worthy. And if you can do it profitably, let's do it. If you can give more people the opportunity to achieve economic stability and mobility, who's going to disagree with that?

People don't disagree about the goals. They disagree politically about how to achieve them and what is the role of government in that? That's where people get divided. Impact investing is the place where people actually come together and it has a lot of bipartisan support, if you want to think about it that way.

Hal Weitzman: Okay, so that also dovetails with the final myth you list in your book that impact investing is just a small market, has limited options. I'm guessing that isn't true because it's a growing market that has ever-increasing number of options.

Priya Parrish: That's right. Yeah, we covered that. More and more options, products in every asset class. It continues and continues. There's place-based investing, and if you want to invest in your community, you want to invest in something in the Southern Hemisphere, there's a lot of ways you can invest with very different financial and impact goals.

Hal Weitzman: Well, Priya, I think we thoroughly debunked, you have thoroughly debunked the myths as you have in your book, Little Book of Impact Investing. So we'll have to have you back to talk more about impact investing, how we can get into it, what we can do with it. But for the moment, thank you very much for coming on the Chicago Booth Review Podcast.

Priya Parrish: Thank you for having me.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe, and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.