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Ben Thornley… ‘Many investors still have a black and white mindset’

With the introduction of ‘social bonds’ and a range of other initiatives backed by a combination of governments and private money, the notion of ‘impact investing’ is creating increasing interest among super funds in Australia and other big investors around the world. Ben Thornley, a former investment journalist in Australia, who is a director of the consulting arm of a community finance company in San Francisco, is delivering a presentation to a conference in Melbourne next week. He spoke with Greg Bright about his work and the expanding world of impact investing.

If you are just starting to feel comfortable with your understanding of the definitions used in the many investment strategies which go to make up the universe known as the hedge fund world, you can now graduate to a new and arguably more diverse world – that of impact investing.

Impact investing, in a sense, is at the pointy end of the ethical investment and ESG spectrum, with a particular emphasis on the E and S. It involves making an investment which carries the two simultaneous aims of making a positive social contribution and making a reasonable return for investors.

According to Ben Thornley, who has worked with the Insight consulting arm of Pacific Community Ventures for the past four years, research on the sector is still in short supply and discussions are ongoing on matters of theory and definition. Even the age of the sector is not clear cut.

For instance, if you include micro finance companies and projects – where firms aim to make a difference in poor countries by issuing large numbers of very small loans to people to start or develop businesses – then the impact investing sector is at least 30-40 years old.

“There are some more mature operations which represent the origins of the sector,” he says. “You have the community finance sector in the US, which now includes more than 1000 community development finance organisations, and the microfinance sector, which date back 40 years, and have essentially been rolled up into the definition of impact investing. Then there is the newer work of the broader philanthropic sector community finance sector, economically targeted funds by some pension fund, and the newer, still, social impact bonds.”

Thornley was one of three lead authors of a report published last year called ‘Impact Investing 2.0’, which followed a two-year research effort designed to identify the main common factors in the success of 12 leading funding firms in the sector, using data from 1981 to 2013. The research was undertaken by three organisations, including Pacific Community Ventures. The researchers identified about 350 firms around the world that it could potentially study, refined this down to 30 for further vetting and then to 12 which they thought were among the best. Those 12 had impact investments totalling US$1.3 billion. The report identified four main common practices among the successful organisations which it termed:

> Policy Symbiosis – Impact investing is grounded in deep cross-sector partnerships, including with the public sector. Impact investing intersects with all levels of government, consistent with the public sector’s strong interest in maximizing social and environmental benefits to society, and the promise that impact investing can deliver these benefits at scale.

> Catalytic Capital – Investments that trigger additional capital not otherwise available to a fund, enterprise, sector, or geography can be transformative, generating exponential social and/or environmental value. Catalytic Capital can be instrumental to a fund, from providing early funding to driving reputational benefits.

> Multilingual Leadership – Those responsible for making investments must execute with unshakable financial discipline, but successful fund leadership is about more than simply effective money management. It requires cross-sector experience and fluency both at the institutional and individual level.

> Mission First and Last – As opposed to being “financial-first” or “impact-first,” successful funds place financial and social objectives on equal footing by establishing a clearly embedded strategy and structure for achieving mission prior to investment, enabling a predominantly financial focus throughout the life of the investment.

Thornley says that many investors still have a “black-and-white mindset” about how they should invest, meaning they see good returns and social good as usually being mutually exclusive.

“Funds have to understand that both financial and social goals can coexist,” he says. “The successful funds have the social impact fall out of their traditional processes. It’s almost like ‘finance plus’. In terms of investment style, it tends to be a thematic play.”

A New Zealander by birth, Thornley grew up in Australia and, after graduating from university, started his career in the late 1990s as an investment journalist at InvestorInfo, then publisher of Investor Weekly. He moved to New York as a correspondent for InvestorInfo’s various titles, especially Investor Daily, returning to Sydney in 2003 to take up the role of editorial director. He resigned to return to New York in 2005 and joined the Invest Australia arm of AusTrade.

“In a sense, [at Invest Australia] we were doing something similar to what we’re doing now: we were a public institution trying to use the private sector – fund managers – to generate economic development… We had some good wins. One that I’m proud of being involved with is bringing AQR Capital to Australia and setting up here, which was good for Australian investors,” he says.

He followed this role with some full-time study in California, completing a Masters of Public Policy at the University of California Berkley, working part-time for a Californian Democratic legislator, and then taking the job at Pacific Community Ventures in 2009.

“When I joined there were just two of us in the InSight team,” he says. “The firm had won, five years earlier, its first consulting contract, with CalPERS. This led to other work including research into what is best practice in economically targeted investing. Now there are seven of us in the team.”

Thornley says that there is still some wrestling going on with definitions by the various industry participants but points of consensus are starting to emerge. For instance, there is broad consensus that impact investing incorporates two key elements:

> Intention – as you are preparing to make an investment, you are specifying an intention for a social outcome too, such as creating jobs in a low-income community, and everything flows from that.

> Accountability – you are able to measure what you are promising to deliver.

There are many more points of disagreement, however. For instance, take the jargon term “additionality”. This term refers to the argument that once a market reaches a point of maturity, there is nothing more that can be done that traditional investors are not already doing. In the US listed equity market as an example, the question is whether an impact investor can do anything additional to make a difference.

Thornley doesn’t go along with this argument. He believes, along with some others, that every market can be made more impactful. In public markets, examples of possible impact investment results are activist investing and shareholder engagement which can affect a company’s outcomes in the community.

Related to the outcomes from income investing and, in particular, the involvement of governments and philanthropists, is the notion of catalytic capital. As the “Impact Investing 2.0” report says, successful impact investors usually use the involvement of various categories of investors in their projects, including those which have different goals for their money, such as governments and philanthropists.

“These types of investors can take more risks,” Thornley says. “They can make something which is uninvestable investable.”

An example of this can usually be found in various government social bonds, including the two which have been issued by the NSW Government. In an early one issued by New York City, which aimed to reduce recidivism among people convicted of crimes, the investors’ capital in that fund was effectively guaranteed by Bloomberg Philanthropies, with the core investor, Goldman Sachs, getting its investment underwritten. With the latest NSW bond, which aims to reunite fostered children with their mothers, investors, including, Christian Super, have had a floor put under their returns. In both cases, if the social outcomes are met, the returns to the investor are higher.

The size of the impact investing market around the world is also open to conjecture. A report published last year by the World Economic Forum put it between US$15 billion and US$28 billion. The forum estimated that there were about 250 global impact investing funds (which can be invested in my mainstream investors, such as pension funds).

Participants like Ben Thornley are hopeful that the figure will rise, with the increasing involvement of pension funds, to at least 1 per cent of all institutional assets in time. That would equate to about $500 billion around the world, and A$10.7 billion in Australia.

Thornley says that the US pension funds which are leading the way tend to be public pension funds, urged on by the trade unions representing beneficiaries. He is hopeful that Australia’s industry funds, which often have 50 per cent union representation at board level, will also lead the way and demonstrate to others that you can simultaneously do the right thing by members’ money while doing the right thing by the broader society in which we live.