00:00:00
Tyler Wry: And when you're talking about
especially early stage impact
00:00:02
investing, which is what the
book focuses on, this gets
00:00:05
really tricky, because not only
do you have to project out on
00:00:08
financial metrics like any other
investor would, you also need to
00:00:11
try and project out on social
impact, and that gets really,
00:00:15
really tricky. So we have some
frameworks in the book that try
00:00:18
and help with that, but to
actually do good social impact
00:00:21
measurement and good social
impact projection, this is
00:00:24
something that is really tough,
and it's actually really costly.
00:00:27
So a big challenge for the field
going forward. Dan Loney: Welcome
00:00:29
to the Ripple Effect, the
podcast that takes you on a
00:00:32
journey through the minds of
Wharton faculty. I'm your host,
00:00:35
Dan Loney, and in each episode,
we'll be diving deep into the
00:00:39
inspiration behind the
groundbreaking research that
00:00:42
Wharton professors have
conducted, and exploring how
00:00:45
their findings resonate with the
world today. Impact investing is
00:00:50
an important way to support
initiatives that will have
00:00:52
positive impact in areas like
the environment or our society.
00:00:57
But where do we stand right now
with the level of impact
00:01:01
investing, and what do you need
to know if you're thinking about
00:01:04
getting involved, especially at
the early stages? Pleasure to be
00:01:08
joined here in studio by
Katherine Klein and Tyler Wry.
00:01:11
They are both Co-Faculty
Directors of the Impact
00:01:14
Investing Research Lab here at
the Wharton School. Great to
00:01:18
have you both with us here
today. And I guess let's start
00:01:20
with just where impact investing
stands right now. There's been
00:01:25
such a -- what feels like, for me
on the outside, a much more
00:01:30
increased focus as this is a
component of people's investing
00:01:34
module over the last decade or
two. - Yeah, 100 percent.
00:01:37
So if we look at the history of
impact investing, the term
00:01:40
really only started to
crystallize around 2007. So in
00:01:44
terms of investing overall, it's
a fairly recent phenomenon. And
00:01:47
if you plot out the assets under
management, it's really
00:01:51
grown exponentially in that
time. So last year was the first
00:01:55
time in history that impact
investing has over $1 trillion
00:01:58
in assets under management,
collectively around the world.
00:02:02
So this is -- it's big, it's
growing. And the idea is, if you
00:02:05
can leverage private capital for
public gain, this is a way to
00:02:09
create impact at a large scale
that's not possible with just
00:02:12
government alone or business
alone or nonprofit alone. - So
00:02:17
Katherine then, and we'll show
the book right here, why now?
00:02:20
Why is -- what's the importance of
doing this book at this moment?
00:02:24
Katherine Klein: So we were excited to do
this book at this moment, given
00:02:28
interest in business schools and
among the public in impact
00:02:33
investing and a real -- we wanted a
how to book that was not
00:02:38
just a user's manual,
but that had a lot of practical
00:02:42
how to knowledge, but also
rigorous -- you know, the academic
00:02:47
backed research to really guide
people in understanding impact
00:02:50
investing. We see just a huge
number of students at Wharton,
00:02:55
both undergrads and MBA
students, who want to get
00:02:57
into the field. So the ability
to provide some, you know, how to
00:03:02
from every stage of the process.
What is this thing? How do you
00:03:05
get started as an investor? How
do you do due
00:03:09
diligence? How do you assess
impact, etcetera, etcetera, was part of
00:03:12
the story we wanted to tell
here. - So
00:03:14
then Tyler, when somebody is
considering this as a component,
00:03:17
what are some of the things that
they should think about first?
00:03:20
- So it depends on if you're
talking about on the investor side or the --
00:03:23
- Okay, let's start with the
investor side. - In terms
00:03:26
of running a fund or investing in a fund?
- Investing in a fund.
00:03:29
- So it depends a little bit on where
you want to make your impact. So
00:03:32
if you look at different impact
investment funds, like any fund,
00:03:36
they're going to have a
different thesis. And so there's
00:03:38
going to be some that are
focused on environment,
00:03:40
financial inclusion, some that
are focused on biotech, med
00:03:44
tech, hard tech, a lot of AI
stuff coming up as well. And you
00:03:49
should also think about the
geography where you want to make
00:03:51
impact. So what is the
functional area? Where is the
00:03:54
geography? And then what stage
of company do you want to try
00:03:57
and support? So this could be
right down to pre seeds. So I'm
00:04:01
a founding partner in an
investment fund called Critical
00:04:03
Venture Partners, and we do pre
seed impact investing. But you
00:04:07
could also look all the way up
to growth equity. Maybe you want
00:04:09
to look at the models and the
firms that are
00:04:12
performing really well, and then
allocate capital to help them
00:04:15
grow and make a real dent in the
world. - Are
00:04:17
you seeing firms or funds that
maybe haven't gone down the
00:04:21
impact road that are now seeing
this as something that they want
00:04:25
to look at and maybe build into
their structure as a company?
00:04:29
- Oh, sure.
00:04:30
Yeah, we have traditional funds
that are opening up impact
00:04:34
sleeves. So you can see that in
VC, private equity, you can see
00:04:38
it in larger retail products.
Once you start to get into the
00:04:42
larger retail stuff, it starts
to get a little bit fuzzy. What
00:04:45
is ESG investing and what is
impact investing? And those are
00:04:49
actually different. So ESG would
focus on the internal operations
00:04:52
of the company, make sure it has
good environmental performance,
00:04:55
social impact, and governance,
whereas impact investing is much
00:04:59
more about the outputs
that the company is creating. So
00:05:02
you specifically target
companies that, through their
00:05:05
productive activities, are
making positive change in the
00:05:09
world.
00:05:09
- So I noticed that in the book,
Bobby Turner wrote the foreword.
00:05:13
I had a chance to meet him a few
years ago at the Global Forum
00:05:16
down in Miami. If you can, talk
about how he is such a great
00:05:20
example of what impact
investing can kind of do for
00:05:26
communities and for companies as
well.
00:05:30
- So Bobby, who's a Wharton alum
and just a real leader
00:05:34
in impact investing, tells his
story of, you know, graduating
00:05:39
from Wharton, very focused on,
let me make a lot of money,
00:05:43
then -- and as he tells it, it's
like, "Yeah, I was just
00:05:45
successful, and I wasn't
satisfied. It wasn't meaningful
00:05:48
to me. I wanted to have more
positive impact in the world.
00:05:51
And so I --" Bobby tells the story.
"I, Bobby, got more and more
00:05:54
involved in philanthropy, and
ultimately, more and more
00:05:58
frustrated with philanthropy. I
wanted --" you know, he would say he
00:06:02
wanted to make a bigger
difference, and thought that he
00:06:04
could do so by marshaling
investment capital, which was
00:06:08
his expertise, and figuring out,
how can we use investment
00:06:12
capital to propel positive impact
and positive financial returns.
00:06:17
He's done it with his particular
expertise, with a focus on real
00:06:20
estate and real estate
development. I think one of the
00:06:24
things that Bobby does
really well, and it is a sort of
00:06:27
story, a useful story, and
insight about impact investing,
00:06:30
is his firm brings together
people who have a lot of content
00:06:35
expertise on the problems they
want to solve. How do we help
00:06:39
communities? How do we create
more affordable housing? How do
00:06:42
we create more workforce
housing? You know, there's
00:06:45
just tremendous expertise
that Bobby's firm is
00:06:50
trying to bring to bear on their
investment strategy so they can
00:06:53
make strong financial returns
and real impact. So that's
00:06:58
a short overview of what
I would say Bobby's doing, and
00:07:01
that's generalizable to a lot of
impact investing.
00:07:04
- So in terms of kind of the nuts
and bolts of the book, Katherine
00:07:07
mentioned there are so many
different components to it, one
00:07:10
of the things that I picked out
that I wanted to talk to you
00:07:12
about is you talk about the
component of opportunity. And
00:07:17
certainly there are so many
opportunities out there kind of
00:07:20
in this realm right now, and you
do have to take the time about
00:07:24
looking at and picking the right
opportunity, don't you? - Oh, 100 percent.
00:07:29
So it's like any type of
investing. There's going to be
00:07:32
way more companies, way more
opportunities that you could
00:07:36
support than you actually can.
And so you have to be really,
00:07:39
really focused in terms of, where
do you want to look, and then
00:07:43
how are you going to recognize
quality? And when you're talking
00:07:46
about especially early stage
impact investing, which is what
00:07:48
the book focuses on, this gets
really tricky, because not only
00:07:51
do you have to project out on
financial metrics like any other
00:07:54
investor would, you also need to
try and project out on social
00:07:58
impact, and that gets really,
really tricky. So we have some
00:08:02
frameworks in the book that try
and help with that, but to
00:08:05
actually do good social impact
measurement and good social
00:08:08
impact projection, this is
something that is really tough,
00:08:10
and it's actually really costly.
So a big challenge for the field
00:08:13
going forward.
00:08:14
- I think we talked about it a few
years ago, but it is just a
00:08:17
unique kind of balance that, for
a long time people wondered, you
00:08:22
know, impact investing, it's
doing good, but can it still be
00:08:26
profitable? And certainly we
know that it is the case.
00:08:30
- It is
00:08:30
the case. You can certainly --
what I would say is, yes, you can
00:08:34
do good, and you can be
profitable. It's certainly not
00:08:39
lockstep and guaranteed.
It's certainly not guaranteed.
00:08:43
And you know, as companies
get investment, and you know,
00:08:47
you talked about sort of non
impact investors getting into
00:08:51
impact investing as an
interesting -- creates
00:08:53
interesting tensions. And at
every stage of a company's
00:08:56
growth, there are likely to be,
not always, but there are likely
00:09:00
to be questions of, should we do
this? Will it be more profitable
00:09:03
for us to do this? And will it
sacrifice impact or not? So
00:09:06
you know, yeah, it's
challenging. It's challenging to
00:09:09
do both well, but we see
many examples of companies and
00:09:13
firms doing both well.
00:09:14
- Yeah, I was going to say that
there's a concept in impact
00:09:17
investing, it's called
colinearity of financial returns
00:09:20
and impact. And so in academics
and statistics, if things are
00:09:24
colinear, they vary completely
with each other. So one is
00:09:28
almost a function of the other.
And so if you look at some
00:09:31
impact investing opportunities,
there will be high colinearity.
00:09:35
So think about a company that
has designed something that
00:09:38
abates carbon and turns it into
methane gas that you can use as
00:09:42
a clean fuel for the shipping
industry. The more that
00:09:45
company grows, the more money
they make, the more impact they
00:09:48
make. And on the flip
side, you could think of
00:09:50
something like micro finance,
where there are some micro
00:09:53
finance banks that make a lot of
money, and there's other ones
00:09:56
where they're trying to help the
poorest of the poor, women,
00:09:59
rural populations, and
that becomes really hard.
00:10:02
There's financial trade offs
that associate with that. And
00:10:05
that's a trickier place to try
and make impact as well as
00:10:07
return. - So how
00:10:08
much growth are we seeing in
terms of just the different
00:10:12
types of avenues that are kind
of coming into opportunity and
00:10:16
impact investing? It seems like
with the growth that we've
00:10:18
seen, in terms of the focus on
environment, on our culture, on
00:10:22
society, that there are new
avenues that are popping up
00:10:26
almost every year at this point.
00:10:28
- I think that's true, and
we've certainly seen growth. I
00:10:31
mean, this is a challenging
period in the United
00:10:34
States as there's some sense of
priority shifting, and how that
00:10:39
plays out for impact investing,
I don't think we know yet,
00:10:42
right? It could drive more
capital with the impact
00:10:44
investing. I want to make an
impact, I like this opportunity,
00:10:47
I'm not seeing so many other
opportunities. You know, maybe
00:10:50
government is actually doing
less, and we ought to really
00:10:53
double down on, you know,
what private capital can do. Or
00:10:56
it may, you know, sway people to
say, "Well, impact, I don't know."
00:11:01
So I don't know, that would be my
prediction. It's hard to
00:11:03
predict, which is no prediction.
- It's
00:11:05
tough, right? Like, you can price
risk, you can't price
00:11:08
uncertainty. It's just
inherently unknowable. So I
00:11:12
don't know. We'll see where it
goes. I think, like almost
00:11:15
anything, the change will make
some opportunities more
00:11:18
attractive and some less
attractive. So there'll probably
00:11:21
be a little bit of reordering in
terms of where the money is
00:11:24
going, and unclear if we'll see
growth in the field or if we
00:11:27
might see a little shrink. But I
think it definitely puts a point
00:11:30
of emphasis on why this is so
important right now, you know? If we're
00:11:35
going through a time where the
government's retrenching its
00:11:37
efforts to do some of this
stuff, how can we bring private
00:11:39
capital to the
table to step into the breach
00:11:42
and hopefully do stuff that's
innovative, efficient, and
00:11:45
impactful?
00:11:45
- The only other thing I would add
is, while impact investing is a
00:11:50
newer term over the last almost
two decades, 20 years, there has
00:11:54
been a long, long history of
thinking about social
00:11:59
responsibility and the ethics of
capital. You know, that -- for
00:12:03
decades, maybe even centuries.
So this isn't a new -- I
00:12:06
don't think that this
consideration is going anywhere.
00:12:11
Investors are always going to
think, "Am I comfortable with
00:12:14
where my money's going?" - What
00:12:15
do you hope that who people read
this book will take away from?
00:12:20
What are the key things
you think are important to touch
00:12:23
on here? - You
00:12:25
know, I think the shortest
answer to that is, I hope people
00:12:28
who read this book think impact
investing is possible,
00:12:35
and understand that it's
challenging. It is not
00:12:38
easy. It takes a lot of thought.
It is a complex process to
00:12:42
balance and prioritize both
impact and financial
00:12:45
performance, but it is possible.
So that would be my short.
00:12:49
- Tyler? - Yeah, I think it's the
same thing. The only way this
00:12:54
field is going to continue to
grow is if we have a pipeline of
00:12:57
smart, motivated young people
who are choosing this as a
00:13:00
career, and to the extent that
we can help them understand the
00:13:03
blocking and tackling of doing
this stuff in practice and make
00:13:05
them good candidates as they go
into funds, or as they start
00:13:08
their own, or even go into
industry and try and do this
00:13:11
stuff, all the better. - Well,
thank
00:13:13
you both for coming in today,
Katherine Klein and Tyler Wry,
00:13:16
Co-Faculty Directors of the
Impact Investing Research Lab
00:13:19
here at Wharton. And as we
mentioned, the book that they
00:13:22
have out right now,<i> An
Introduction to Early Stage</i>
00:13:25
<i>Impact Investing.</i> Thank you for
listening to the Ripple Effect.
00:13:29
We hope you found this episode
informative and engaging. Don't
00:13:32
forget to subscribe and leave us
a review so that we can continue
00:13:36
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from the Wharton School.
