Stock markets worldwide continue to be in tumult, so it is premature to start talking about any lessons learned during the financial crisis of the past year. Certainly, a more active regulatory presence may have helped. But what hasn’t changed is the need for transparency and complete information from the investments. For social investments looking for investors, they can only begin to feel confident with complete information and total transparency.
After the market turbulence of the past year, no one really knows what it’s going to take for investors to regain confidence in investing. But providing full information and being transparent in business dealings can go a long way in helping investors feel confident about where they put their money.
Social investments are no different from traditional investments. The more information and transparency provided for the investment, whether it is a public or private offering, the more sure an investor can be in putting their money there. But where social investments differ is in the need for information and transparency in how they report their impact. Doing so, however, is not so simple. Every social investment has a different impact, and the way it is measured varies investment by investment.
Despite the problems of the past year, this is where publicly traded investments can be a model. Regulatory agencies, such as the Securities and Exchange Commission in the United States, insure that all public companies report all information in a timely manner. The agencies standardize that information so that results can be fairly compared. Social investments have no such agency that sets out how impact is measured, making it impossible for an investor to quickly compare and contrast impacts of social investments.
But some organizations, including Investing for Good in the United Kingdom and Social Impact Research in the United States, are applying their own methodologies and analyses to these investments so that investors can easily compare the investments and impacts. But the problem is that the information is not standardized and few firms are rating the investments.
Here at Investing for Good, we act as an intermediary between the investments and the investor. We believe that investors deserve the most accurate and complete information available on their investment. Toward that end, we compile all information, research the offering, write a report and rate the investment for potential investors.
When preparing our own analysis and ratings for each investment, we compile a comprehensive body of information, and use this to score the investment in the three crucial areas of Confidence, Return, and Impact. Confidence relates to the financial stability of the investment, for which prominent scoring criteria include the operational strength of the organization, as well as management, operating history and relevant risk factors. Return measures the projected financial return. Impact assesses the social and environmental benefits generated by the investment, which are measured and analysed with respect to the company's stated mission as well as - crucially - its target stakeholders. Where traditional equity research would look at the financial results alone, our Impact Investing Analysis Methodology looks at the complete picture of the social investment.
Similarly, Social Impact Research, a division of the nonprofit Root Cause, models its research reports on private-sector equity research. The reports aggregate and analyze information from the companies themselves, but also from government agencies, grant-making organizations, think tanks, academics and consultants.
Later this year, the Acumen Fund in the United States will launch its own Portfolio Data Management System, created in collaboration with engineers from Google. The system will compile financial, operating, social and environmental performance results at both the portfolio and sector level, but it will not rate the investments.
The report, “The Nonprofit Marketplace: Bridging the Information Gap in Philanthropy,” written by the Hewlett Foundation and McKinsey & Co. concludes that philanthropic ventures, which it describes as “the nonprofit marketplace,” have much to learn from traditional capital markets. The report concludes, “The nonprofit marketplace lacks the robust flow of timely, accurate information that is a hallmark of high-performing markets such as stock exchanges, commodity markets, or eBay. To bridge this gap, the sector must capture, analyze, distribute, and use information on nonprofit organizational performance and social impact more effectively.”
As the late Anita Roddick, founder of the Body Shop said, “I want something not just to invest in. I want something to believe in.” Investors will have something to believe in only if they have confidence in the information they have.