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Impact investing doesn’t mean settling for lower profits. Veteran impact investor Stephanie Rupp discussed the importance of authenticity in impact investment with Karma Network and how it can enhance financial performance.
Ms. Rupp, former head of impact investing at Tiedemann Advisors, boasts more than 20 years of experience in ESG investing.
In conversation with Karma, she explained why investors should focus on social goals as more big players like Blackstone get serious about impact investing.
Scarlett Kuang: Blackstone launched an impact investment platform on Monday. Why do you think they are doing it now?
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Stephanie Rupp: From my experience working with ultra high-net-worth individuals and some large family offices, I see this as a movement driven by asset owners instead of asset managers.
On one hand, it’s the threat (of) women and millennials (who) are coming into control of assets. They are more socially conscious and want more social good and social justice. Asset owners are requesting (impact investing), then (asset) managers are following. There’s a fear of missing out. Everybody’s scrambling to have an ESG portfolio.
The other reason is that bigger institutions, such as pension funds, retirement funds, sovereign wealth funds, are starting to see climate change as a true global threat and financial risk. They see climate change, global warming and the ensuing impacts on coastal populations and food systems as really problematic, so they want some form of environmental overlay to their investments.
Scarlett Kuang: You’ve said that you take a “100-year view” with your client relationships. How do we reconcile investors’ expectation for short-term financial returns and the fact that positive impact takes a long time to realize?
Rupp: In wealth management, we work with individuals, families and institutions, and they usually have a long-term goals. When you think of a diversified portfolio, it is usually structured to both preserve and grow capital, and in the “growth bucket” a lot of the asset classes are actually illiquid. If you look at any private equity and venture funds, you are looking at least 7 to 10 years lock-ups. The same can be true in real estate investment. In these categories, you can find some great impact investments with potentially high returns. Generally, you can meet your risk, return, liquidity and impact goals over the long run – the sector has enough proof points now, with 10+ year full diversified impact portfolios with foundations aiming to exist in perpetuity.
Scarlett Kuang: You have also urged investors to refocus on social impact, people in need, and rethink how to pick managers. What do you say to those investors who think this impact-focused approach can negatively influence financial returns?
Rupp: The industry’s definition of impact investment is really to have financial return alongside social and environment impact, and to move beyond the “trade off” conversation. We need to strike a balance between conducting financial and impact due diligence as much in private equity as we do in public markets. We need full blown impact analysis of strategies and to keep asset managers accountable to their “intended impact”.
There’s a true disconnect right now between many ESG asset managers and what they claim. Investment managers don’t verify the underlying impact and many decisions are made based on unaudited ESG data.
This is less a problem in private equity, but still exists. Let’s (take) a private equity firm that invests in education technology. What they usually do is that they’ll meet the entrepreneurs and engineers to try to understand the technology. That’s great, but then you should also go visit the schools and the students, and see what impact that technology has on the ground.
Too often, the investment professionals will just look at the company without actually visiting the beneficiaries or stakeholders. I think that’s an extra step that has to be done. If you know the customers well, you actually have a greater chance of success in terms of adoption and usage.
Scarlett Kuang: Can you talk more about how doing due diligence would benefit financial returns?
Rupp: I’ll give you an example. In the microfinance space where financial institutions issue small loans at low interest rates, if you don’t meet the borrowers, you risk making bad investments.
A few years back, I’m talking specifically of India, hundreds of millions of dollars were moving quickly into the microfinance space without (investors) doing sufficient interviews of the loan borrowers. It turned out that those borrowers were over-indebted, specifically in the state of Andra Pradesh. Eventually what happened is that the market collapsed because these individuals were unable to repay.
The reactions were suicides of borrowers for cultural reasons around shame and indebtedness. It’s a tragedy from a human perspective, and bad from a financial perspective, because there were loan write-offs. The institutional investors, who had plugged in so much money thinking they were going to get a healthy 14 to 18% return, actually lost their principal.
All this because no one bothered to do due diligence on the ground, to meet the borrowers and see what their actual situation was and how they were managing the debt. In a way, it is just good business to be able to do field visits and understand the needs of customers and communities.