How impact-first investing can drive social change

Michael Etzel, partner at The Bridgespan Group, joins Yahoo Finance to break down impact investing and how it compares to ESG investing.

Video transcript

JULIE HYMAN: First of all, let's talk about what impact investing is, right, because it's not philanthropic giving. But it's more sort of investing where you're prioritizing the impact, the philanthropic tenor or goal over the profitability of the investment. Do I have that right?

MICHAEL ETZEL: Absolutely. And-- and this is something we've really seen exploding in growth over the last 10 years. And it's a pretty big tent, this impact investing idea, where we've seen private equity and big fiduciary investors driving a lot of progress there. But what we're focused on is a specific corner of this idea of impact investing, which is really an impact-first flavor.

We're coming out of a year where we faced three massive crises between COVID, racial injustice, climate change, and we're just not making progress fast enough. And this is a year that-- the "Forbes" report came out a little earlier this week, 30% more billionaires were minted in the last year. And Campden Research finds that 82% of those wealthy families feel like they need to play a role in solving these types of social problems, but less than 9% of their portfolios are allocated in this way. So we really see a big opportunity at this pivotal moment for a new take on impact investing that puts impact first.

MYLES UDLAND: Where does-- you know, Michael, where does ESG fit in here? Because I think the conversation we've had on this program a lot with your traditional allocators who kind of cite these same numbers, and they say, well, you know, we have ESG strategies, and that's what people are asking about. And there's a larger debate over whether they actually accomplish anything different than repackaging the index. How do you guys think about differentiating, I guess, from-- from that kind of strategy?

MICHAEL ETZEL: Yep. ESG has-- has really pushed to become a new baseline coming out of a year like 2020, where you can't ignore some of these fundamental questions like, how does a business treat its labor force? What is your carbon footprint? And that's what we see happening on the ESG side of the landscape.

We're pushing a little bit further here with this idea of impact first and impact investing to say, what are the products and services that these businesses actually do for society and the environment? Do they improve educational outcomes? Do they reduce the amount of carbon emitted into the air? Do they save lives and improve livelihoods? So it's a set of questions that that ESG investing is-- is teeing up, but not fully answering.

BRIAN SOZZI: Are there any companies you can point to that are-- that are doing ESG initiatives the right way or-- or to the extent that you would like to see?

MICHAEL ETZEL: Sure. ESG is something that has really been about differentiation in the last couple of years, so not just are you meeting the minimum standards, but are you going above and beyond that? And in the types of companies that we were looking at for a report like this are really at the cutting edge of their markets. It might be a business that is bringing something like crop insurance to a country that's never had it before, which makes a huge difference in the livelihoods of farmers when they face a dry year. So those are the types of companies that are really pushing beyond that table stakes kind of ESG and getting into this impact territory.

JULIE HYMAN: And also, when I think about the kinds of companies and entities you're talking about, I wonder when you're talking about allocation of capital, though, does this mean if people are attracted by this kind of impact investing is some of the money then not going to flow into pure philanthropies? And-- but also, is it sort of going to improve the efficiency of things that might otherwise be philanthropic, but instead are profit-making enterprises, if that makes sense?

MICHAEL ETZEL: Mm-hmm. Well, the way that we think about this is it's-- it's the middle point on that line. It's-- it's not a replacement for philanthropy, and it's not a replacement for disciplined fiduciary investing. It's something that sits right in the middle. And it just defines success differently. It doesn't define success through your portfolio return.

It defines success through, did we make progress faster? Did we get more carbon out of the air faster? Did we save more lives faster? And it flips around the accountability to take the tools of accountability from philanthropy and the tools of investing to bring a new complement in the portfolios, particularly of very wealthy families and individuals who are going to be the ones that lead and develop this market so that in three, five years, there are more opportunities on the retail side.

JULIE HYMAN: Well, and I want to just quickly get you to explore that a little bit more. When you're talking about these high-net-worth individuals who are sort of the target of this kind of research that you're putting out, I mean, what size are we talking about here? What's the purchasing power or investing power of this group? And how interested are they in this kind of opportunity?

MICHAEL ETZEL: Sure. Well, this is the high-net-worth and ultra-high-net-worth segment of the market, which controls something like 40% of investable assets, so pretty significant from a purchasing power perspective. And that's where we've found from organizations like Campden Research that say about 82% of those types of families are quite interested in their social responsibility and see this as part of their future investing.