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Architects of a ‘social investment data engine’

By Tom Stabile

Published: April 11 2010 12:52 | Last updated: April 11 2010 12:52

A new group is aiming to revolutionise the standard maths used to select investments for billions of dollars worth of assets by constructing a data engine that contrasts – and quantifies – the tangible social benefits of investing opportunities.

The common recipe to judge an investment’s relative worth often hinges on its performance against benchmarks or peers, but the new system’s architects want to inject a measurement of social good into that valuation. The New York-based Global Impact Investing Network and its partners aim to introduce a broadly accepted arbiter to determine, for instance, whether 20 seasonal jobs on a Kenyan coffee farm produce the same social good as 20 full-time positions at a textile factory in Guatemala – and help investors use that information alongside financial returns data.

The drive to build and pilot a taxonomy, database, portfolio management tool and rating system to standardise comparisons of social benefit started out in the “impact investing” world – a smallish community of organisations trying to bring capital to developing world business enterprises on the front lines of combating poverty and underdevelopment. The sector, which focuses on merging goals of generating both social good and financial returns, now has more than $50bn (£33bn, €37bn) in assets, but an industry estimate sees potential for that volume to grow to $500bn within the next decade.

A formidable array of organisations joined forces last year to form GIIN and propel the effort, including the Rockefeller Foundation, Deloitte, PwC, Hitachi, Citigroup, Deutsche Bank, JPMorgan, and the Bill & Melinda Gates Foundation. Many of them had been working separately on pieces that are now part of the overall initiative.

But proponents say the framework GIIN is creating may not only bring capital to worthy organisations in far-flung locales, but should also establish benchmarks that could rate the social good any company, bond, or fund generates.

The target of GIIN’s Impact Reporting and Investment Standards initiative are the masses who would be willing to choose investments based on their social benefit if only they had a credible way to measure it, says Sarah Gelfand, director of the IRIS project. The approach differs from better-known environmental-social-governance (ESG) reviews, because those tilt more toward analysing actions to minimise socially negative behaviour and often do not capture comparable, quantifiable data points.

“The difference here is that we’re trying to look at the proactive, mission-driven organisations that maximise positive impact,” Ms Gelfand adds. “This absolutely is meant to build a market for the for-profit investing world to participate, and to use standards, auditing practices, and rating agencies that would make [impact investing] more accessible to the broader investment community.”

A critical component of the initiative is the Global Impact Investment Rating System that will provide a judgment akin to a Morningstar investment rating or S&P credit risk rating. “The core users will be institutional or high net worth investors or fund managers or entrepreneurs in the impact investing world,” says Andrew Kassoy, co-founder of B-Lab, which has been building GIIRS.

Other partners are laying accompanying foundation stones. One is the extensive IRIS glossary of definitions for hundreds of data points – such as volume of irrigation-quality water produced or number of mortgages funded in low-income communities – that professional investors and fund managers can use to track socially beneficial attributes.

Another is the “data aggregator”, a repository to compile the data points on multitudes of organisations for market comparisons, benchmarking, and other analytics. And yet another is Pulse, a web-based portfolio management software application designed to help money managers track the socially positive impact of investments by plugging directly into the IRIS taxonomy and database.

Most of the tools are already running in pilot form with versions open for comment and further development. Apart from the ratings, they are free to access. The partners plan upgrades for most of the systems in the coming year, including a new version of Pulse set for release this month to 150 new test participants. There were six organisations piloting its use so far, including Acumen Fund, which invests charitable donations in enterprises that supply health-care and clean water in developing countries, and is a principal author of Pulse along with Salesforce, Google, and App-X.

There are still various kinks to resolve. For instance, Pulse needs to better account for currency differences and ensure consistent entry of data points, says Brian Trelstad, Acumen’s chief investment officer.

But the grunt work now by pilot participants is paving the way for a future market, he adds. “There is real demand, but it will take two or three years before it becomes pervasive,” Mr Trelstad says. “It’s hard to get there unless we develop standards we all agree on. For example, [we’ll define] what a job really means – how many hours per week, whether it has benefits, and other parameters.”

Such tools especially could appeal to people new to impact investing, says Michael Lent, partner at Veris Wealth Partners, an advisory firm that specialises in sustainable investing. “And it could drive investments,” he adds.

The system could translate into an infusion of mainstream money to such investments, says Mildred Callear, chief operating officer of Small Enterprise Assistance Funds, a non-profit private equity fund long active in the impact investing sector.

“That would be Nirvana,” she adds. “All of us fantasise about capital flowing to the space from retail investors and public equity and professional money managers.”