The track record of an investment manager is a key fundamental of any investment, including impact investments.
Many of today’s institutional investors are familiar with the growth of impact investing, and yet many more seek to better understand this vital and growing sector. To illuminate the opportunities and challenges of impact investing, IMPACT Community Capital (“IMPACT”) has asked some of its owners—institutional investors who embraced impact investing as early pioneers—to share their perspectives. We think now is the right time for this opportunity and we hope this series deepens your knowledge of what impact investing means, how it fits into an institutional investment approach, and what questions your organization should answer when deciding whether to invest for impact.
Violet Osterberg serves as Managing Director at Pacific Life Insurance Company. Violet focuses upon a range of investment categories in her role including emerging markets, credit research, portfolio management, and fixed income impact investments. She has also served on the board of IMPACT since 1998.
How did your institution get started in impact investing?
VIOLET: Back in the late 1990s, Pacific Life started considering nontraditional investments that supported the communities we serve. There were some intriguing opportunities, but overall, the market wasn’t providing the kinds of solutions that would enable us to invest for impact. We needed a manager to originate investments which provided economic returns commensurate with the portfolio and reflected the way we underwrite investments for an insurance company, which is a regulated entity. That was back in 1997 and the concept of joining with other insurers and creating IMPACT was born.
What were the investment criteria your organization required in these new investments? Credit quality? Process? Scale?
VIOLET: All of the above. We needed a level of diligence applied to the credit fundamentals of potential impact investments that would give us an opportunity to invest in low-income communities. We were seeking a style of investment that delivered a kind of “high mileage effect” on people and neighborhoods along with bottom line results.
That’s an interesting phrase—high-mileage. Can you elaborate on what you mean?
VIOLET: By high mileage, I mean investments that were intentionally designed to provide a service or benefit to low-income communities. In those early years, we dabbled in supporting healthcare and childcare facilities, but we quickly identified there was greater potential for Pacific Life to make a difference in the lives of people through the low-income housing market. We could create a platform that supported the development of a great number of affordable multifamily housing communities and deploy capital at a scale making these investments efficient for a large institutional investor. IMPACT delivered a programmatic kind of approach to delivering impact to communities.
How would you define impact investing?
VIOLET: I was working on this long before “impact” was a vogue term. I would say impact investing is an investment rooted in a real, solid asset class–that, alongside risk and return, also has an objective of creating societal impact. For investors who are interested in investing in impact, it's an investment that goes on your balance sheet with the potential to provide real returns, but one with added tangible benefit to a community and to the world.
At Pacific Life, are the financial and social aspects of impact investments measured on equal terms? Is one more important than the other?
VIOLET: There’s a distinction in our institution between investments with an impact component and the charitable and philanthropic contributions that we make—all the different avenues through which Pacific Life demonstrates its values. Impact investments have to be underwritten and they are scrutinized the same way that we approach any investment. And because we perform that diligence, we can deploy a lot more capital that helps to address social needs than we could through just charitable giving. We can help communities in a much greater capacity by identifying opportunities that live up to our standard for investments and that others might miss.
Do you focus primarily on debt or equity investments when you approach impact investing and, and why have you favored one or the other?
VIOLET: As a regulated entity, we prefer debt investments. We have a duty to protect the credit worthiness of our company’s assets for the benefit our stakeholders. Equity investments carry a significant capital charge for us. On the other hand, when we invest in fixed income, the debt securities we choose carry stronger credit ratings and a resulting capital charge that is much lower than our equity investments. This gives us the ability to invest bigger dollars and make a larger impact on communities. All the while, we can maintain the credit quality of our investment portfolio that is expected of an insurance company.
It sounds like the commitment to impact investing within your organization doesn’t require you to adjust your investment approach?
VIOLET: I think we’ve shown that investing for impact doesn’t necessarily require an organization to compromise in terms of accepting higher risk—that you can do so in a very safe and sound manner. You can apply rigor that allows you to identify investments that seek the same level of return as many of the portfolio’s more traditional investments. It’s equally important to define the purpose-driven objectives and to track the real world impact these investments produce. This is where an advisor with a track record can be especially valuable.
Do other leaders within your organization support being a large-scale impact investor?
VIOLET: Even though we’ve been doing this for a long time, there are still challenges in considering impact investments due to the gatekeeping decisions that must be made when evaluating these opportunities. For example, our people sometimes struggle to figure out where impact opportunities fit within our organization. Is an impact opportunity an investment for the real estate team, the equity team, or the asset-backed folks? I think a good way for institutional investors to approach impact investing is to first identify a home for it within their institution. Look at impact investments first for the investment fundamentals—thesis, risk, return etc., and this will lead to the right group within the organization to underwrite the investment. Just like any other investment opportunity.
What are some other challenges for institutional investors in investing for impact?
VIOLET: Most institutional investors have been presented with pitches for “impact investments” that clearly require a tradeoff of economic returns to support a worthy social aim. As a result, there is a false narrative in the institutional world, that impact investing requires this trade-off. But the point today, as our experience shows, is that this type of compromise is not a necessary requirement in order to invest for impact. There are definitely impact investments out there that withstand the rigor institutional investors apply to all investments, and which in turn allow for investing on a larger scale that results in significant benefits to communities.
Another challenge I see is that institutional investors are now being approached by a variety of newcomers to investing for impact that lack a track record and experience in originating impact investments and evaluating impact. The track record of an investment manager is a key fundamental of any investment, including impact investments. At Pacific Life, we have the benefit of working with a conduit that has focused on impact investing for two decades, that has established a track record, understands our appetite for risk, and importantly, can help us to identify appropriate impact metrics and evaluate performance against those metrics.
Have impact investments delivered the performance you envisioned?
VIOLET: Our impact investments have definitely met our goals at Pacific Life. They have proven to be very stable assets through up and down economic cycles. They’ve also added a new tool through which to increase diversification for our general portfolio and to reflect the values of our organization. In short, they have performed financially and produced the intended impact. I really feel proud about the benefit that our team has been able to impart both for our company and for communities through impact investing.
Disclaimer: This post is not an offering document for any securities. It is also not an offer of, or an agreement to provide, advisory services directly to any recipient. The information presented is intended to describe certain views of the author and Impact Community Capital LLC. The information presented in this post may contain statements of opinion, forward- looking statements and relies on certain assumptions. Any such opinions, forward-looking statements and assumptions may be inaccurate, and there can be no assurances that the examples included herein will reflect actual investment outcomes. Neither the author nor Impact Community Capital LLC intends or assumes any obligation to update or revise these opinions, forward-looking statements and assumptions in light of developments which differ from those anticipated. Past performance may not be indicative of future results and there can be no guarantee as to the return or volatility of any particular impact investment or set of impact investments. All investments carry a risk of loss that investors should be willing and able to bear. Use of this document is subject to the terms and conditions set forth on Impact Community Capital LLC’s website and can be accessed at http://impactcapital.net/about....