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How to approach and drive results with impact investing
In this episode, EY’s Chris Hagler and Prudential Impact Investment’s Luke Apicella share practical advice for impact investing by talking through the history, approach and results of Prudential’s impact investments.
Creating social, environmental and economic opportunities through investments. How finance leaders can engage.
The Global Impact Investing Network estimates that the size of impact investment market is nearly US$502b. It has doubled since last year and is expected to continue to grow. Tune in to learn about how Prudential determines their focus areas and measures their impact.
Key takeaways
The World Economic Forum states that impact investing is an investment approach that intentionally seeks to create both financial return and positive social or environmental impact that is actively measured.
Measurement remains to be one of the hardest parts of the industry to agree on and an area where academia could be instrumental.
You don’t need to have the title of impact investor to make change. Focus on the commercial purpose of your business, so it’s not about how you give away money, but how you make money.
For your convenience, full text transcript of this podcast is also available.
Chris Hagler
Welcome to Sustainability Matters, a podcast series of EY. My name is Chris Hagler, and I’m one of the leaders in our Climate Change and Sustainability Services practice and your host for this series. We designed this podcast series to provide leading trends and practical advice around the environmental, social and governance, or ESG, issues and opportunities facing businesses today.
Our topic today is Impact Investing. As my colleagues and I work with corporate clients in the US and around the world, we often work with our clients on two items. One, figuring out financing for sustainable solutions, and two, building a business case. And today, investor focus on ESG issues is a major part of that business case. But impact investing goes beyond just investors considering ESG when making an investment. Impacting investment sees ESG outcomes as the reason for the investment. Or said another way, impact investments are investments made with the intention to generate positive, measurable, social and environmental impact alongside a financial return.
While measuring the impact investing market is not an exact science, the Global Impact Investing Network estimates that the size of this market is nearly $502 billion and it has doubled since last year. So, what’s driving these investments and what do they look like? Today, I’m joined with Luke Apicella with Prudential Impact Investments. He’s going to share his insights on how his organization views impact investing, determines their focus areas and understands the impact that they are creating. Thank you for taking the time to join us, Luke.
Luke Apicella
Hello, Chris, I’m excited to be here. As I walked through the EY offices I saw the firm’s motto, Building a better working world. And I feel like I’ve found my kin.
Hagler
(Laughs) Oh, for sure. We are very proud of building a better working world and feel like we’re doing it every day. So glad you’re here. As we get started, Luke, can you share with us a bit about your personal background? How did you get into impact investing, and what was your connection?
Apicella
I studied entrepreneurship in undergrad, and I remember the first business plan I ever developed was what would be considered now a social enterprise. Back then it was even hard enough to define entrepreneurship. (Laughter) I always knew that the biggest problems offered the biggest opportunities and that’s where I really started to focus on social and environmental issues.
And so, when I joined Prudential, and there was an opening to be an analyst in the Prudential Social Investments Group, I did everything I could to get that job. I totally went unsolicited to the vice president of the group and knocked on his door during lunch, which was locked, of course, and he opens it up with an apple in hand and says, “Why are you here?” And I said, “Well, this is what I want to do.” And he said, “Why?” And I didn’t think that far at the time, but I came up with a nice enough answer to win the job, and I’ve been doing it ever since.
Hagler
That’s awesome. And can you tell us a little bit more about impact investing at Prudential. Give us the outline of what you all do and what it means to Prudential. One of the things I’ve noticed as I’ve been working with clients and doing research, impact investing just seems to mean so many different things to different organizations. Can you help us to understand what it means at Prudential?
Apicella
You know, I think that this one question about what impact investing is could take up the majority of our time here. (Laughter) So, I’ll just try three different ways of answering it. The first is what you introduced with which is what I’ll call like a working definition of impact investing. The World Economic Forum states that it’s an investment approach that intentionally seeks to create both financial return and positive social or environmental impact that is actively measured. I think it’s worth repeating that. The Global Impact Investment Network known as GIIN, which is arguably the trade group for the industry, has a similar definition. And this serves its purpose.
Unfortunately, the second explanation I’m going to give is what I think the term has really become and how it’s used today, which is it’s really just a values-based investing — a sort of investment allocation through virtue. And I think this is problematic. It takes away from the key feature that was the essence of why the “impact investment” term was coined. And to illustrate this, kind of for my third explanation, I’ll give a brief anecdote.
When I first heard the term, it was 2008 and I was sitting in my cube, and the leader of our group came over, which was then called, as I mentioned, Prudential Social Investments, and said, “Luke, there’s a new name for what we do. It’s called impact investing.” And it was like he saw these words lit up on a marquee in Times Square. He was glowing. It was either the excitement of this new movement or it was just some leftover feelings from being at the Bellagio Center where the Rockefeller Foundation hosted this event, where I believe it was first introduced.
What I found really important, though, was it was a time to craft a new name. The conferences during kind of the middle parts of the 2000s were all around corporate social responsibility, social-responsible investing. There wasn’t this term, impact investing, yet there was a movement of work that was really focused on the change. And it was much more intentional about the positive outcomes beyond just the responsibility, but really a proactiveness to engage and serve the benefit of external stakeholders, community environment way beyond what the traditional investment field was doing.
Hagler
You’ve defined impact investing to say it’s not just doing good things, it’s intentionally investing, looking for particular social and environmental impacts. I think that makes sense. Talk to us a little bit about what that specifically means at Prudential, how you go about doing it. I understand you have a billion-dollar impact portfolio, is that right?
Apicella
That’s right. And I think we’ll get there, but I’d like to start with the beginning. And I think that’s how we’ll really understand why it’s important to Prudential.
So, Prudential was founded in 1875 in Newark, New Jersey, which at that time was very much a factory town. The railroad was built from New York. Industries like leather goods and breweries and clothing factories were all rapidly growing. And the reality of the day was the working people were facing tough circumstances. There were injuries and death in the factories that would take a tragic toll.
Insurance is very much a community product. It requires a network effect very similar to the business models we see today in social networks. You can imagine these humble beginnings of trying to organize people, gathering groups walking out of work or at church, or going door-to-door. This is really community organizing, and what it offered people was the chance to share in risk and peace of mind. Since then, obviously, the company has grown. Its financial products continue to reach the masses and offer financial wellness, and while the distribution channels are different, the value proposition is the same.
As the company has grown it’s been a much larger steward of assets, and there’s this history of the company allocating capital towards investments that intentionally serve society. And I won’t go all the way through this long list, but it’s important to know that in 1976 the group was formalized as an investment program with a dedicated team to make these sort of investments. And for a long time, this focused on community development and, more recently, evolving to include other social enterprises.
And 2014 is when we made the commitment to have a billion dollars in assets under management. And we sit here today, and any second now, we can declare that we’ve originated $2.4 billion, and we have the billion dollars of fair market value.
Hagler
So, Luke, it sounds like community has always been a part of Prudential and you’ve just formalized it with your impact investing arm.
Apicella
That’s right. And we think we have a rather formal process to go about doing this sophisticatedly. While sometimes we can be opportunistic and just see the next best thing, we really try to, first, study an issue area, typically one that aligns with a Prudential main business and then come up with an investment strategy for addressing it.
Hagler
Can you tell us a little bit more about that? How do you decide what issues to focus on? You said you focus on an issue area aligned with the business, how do you decide that?
Apicella
So, one of our main focus areas has been on income and equality, and this topic is vast. At the company level, it’s clear that income and equality will result in economic slowdown because it hinders demand. We think about creating economic opportunity in strategies like education technology, financial technology and affordable housing, and we have a number of items in our portfolio that hit to this. I’ll kind of illustrate with three.
One is the Freelancers Union, which about a decade ago organized the gig economy to get affordable health insurance. Another is the Disability Opportunity Fund, which is the country’s first community development finance institution that focuses exclusively on people and products that serve people with disabilities. They’ve been doing some amazing investments. For example, they’ve recently funded a company called Ultranauts that uses the inherent strengths of people with autism to do quality testing on software.
And third is a very long-dated relationship that we’ve had with Habitat for Humanity that dates all the way back to the early ‘80s. Towards the end of the 20th Century, we started working on them with a securitization model, and we took this kind of massive amount of loans that they had with all their affiliate homeowners and provided them with liquidity to speed up the building that they could do for low income households.
This is the notion that there are a lot of opportunities out there that the mainstream economy isn’t addressing. And so, it’s going to take some early risk-takers to go there and experiment and show that these are very sensible, economically viable places to put capital and to drive business strategy.
Hagler
Right. I think I heard you say, “We identify these issues,” and income and equality being one you’re particularly focused on, and you’re choosing those because you think it will provide financial benefit and economic benefit over the long run. So, this isn’t a do-gooder strategy from Prudential, it is a let’s find a social outcome as well as a good financial outcome.
Apicella
There’s definitely both. It’s a shared value. That’s the idea that we use. It is this exploration that the Impact Investments team will end up developing other opportunities for the mainstream business.
Hagler
Love that. How do you know if you’re doing a good job? How do you know if your efforts are creating the financial and the social or environmental impact that you’ve laid out to make?
Apicella
I think it’s fair to say that measurement remains to be one of the hardest parts of the industry to agree on. There’s a lot of reasons for this. First and foremost, while we all try to use this moral high ground in our investment decisions, these standards are inherently prefence-based, and so, it has proved very difficult to compare investments.
Methodologies like cost-benefit analysis or other monetization approaches I think are the Holy Grail, but we have to get the value right. For example, how do we value a conservation project that prevents deforestation? Do you value it based on the future cash flows of selling carbon credits? Is it the pharmaceutical sale from the discovery of a bacteria that can cure a disease? Or is that the forest is just worth the timber and the agricultural operations that are planned for the space?
Hagler
Yes, and, you know, tough to compare. I was working with a client recently, and they do work in education and they also do work in affordable housing. And you’re like, well, can you compare number of books to number of individuals in affordable housing? It’s like, well, well, no. You know? It’s tough to balance and say which one should we put more time, money and effort into?
Apicella
There’s no easy answer for it. We just have to be disciplined in seeking an objective and then figuring out how do we measure that objective? And I think this is a place where academia could be really instrumental and then practitioners like accountants and consultants.
Hagler
Thanks for the nice callout there. We actually do a lot of this kind of work. (Laughs)
Apicella
Exactly, and we’re going to rely on you and start paying you to do it for us. (Laughter) Because I think we’re getting better at it, but we need to put as many heads together. And really, society needs to come together. I think that’s what the SDGs do best. They bring the conversation of society’s goals to the fore. It stirs the conversation. And the work that the UN SDG committees are doing to defining the outcome seems promising.
Hagler
I fully agree with you, Luke. I think the SDGs are really important. I’m surprised how often I say that phrase, SDGs, and people don’t know that that’s the Sustainable Development Goals that were created by the United Nations in 2015, with an intention to achieve those outcomes by 2030. So, does Prudential look at the SDGs when you consider what outcomes are we trying to create?
Apicella
We do. We use it as a framework. And I think that the confusion in the public is because there’s this alphabet soup of acronyms, but it’ll all get sorted out. People will decide which ones work best with their objectives. We’ve used a couple of measurement practices that we find to be really useful, using objective third parties like B Lab, which Prudential was an early supporter of, or finding consultants that can really do strong life cycle analysis for accounting environmental effects.
Hagler
Using maybe the natural capital protocol or something along those lines.
Apicella
Right on.
Hagler
Yes. Luke, on these podcasts I like to always give our listeners a takeaway — some sort of call to action or something that they can do. So, if you’re a CFO or a chief sustainability officer listening to this podcast, how can they engage with impact investing, or what should they take away from this?
Apicella
So, the first thing I would say is you don’t need to have a title of “impact investor” to make change.
Hagler
Absolutely.
Apicella
The second thing is really focus on the commercial purpose of your business so it’s not about how you give away money but how you actually make money. And I think that’s where the accountant and the leaders — and I use this term “leaders” pretty broadly, for everyone from the C-suite down to the newest employee who thinks of themselves as an entrepreneur.
Hagler
Yes.
Apicella
When they connect, they’re going to really be describing what is the purpose of the business? You know, that usually falls in one of the first footnotes in your financial statements. And leaders make resource allocation decisions. Where they place resources is what the world’s going to look like. For example, our energy mix is going to look exactly like the investment decisions that are made today 20 years from now. That’s kind of the useful life of these assets. Our diet is going to look like what products are placed on the shelves.
So, don’t underestimate your ability to influence, believe that diversification is the ultimate risk management strategy and urgency is totally necessary.
Hagler
Absolutely. Thank you for that. Let’s talk about what’s next. What’s next for Prudential as it relates to impact investing and, maybe, even what you see in the marketplace?
Apicella
I believe the future of impact investing is, of course, very bright. There will be some fog that people need to navigate through. Things that we have discussed so far, like what does impact investment really mean, how do we measure it? What does an investment have to achieve in order for it to qualify as an impact investment? That’ll still be there. And the commandeering of the term by the mass market will undoubtedly lead to some consternation and confusion trying to distinguish between the status quo, branding and actual impact.
But I think that as long as impact investors keep pushing into the unknown, keep experimenting, keep analyzing the risks and, most importantly, keep trying, this is a great way to make progress for our society so that it looks like something that we’re proud of.
Hagler
Awesome. What a great thought for the future. I appreciate you sharing also that there are some challenges — that impact investing is addressing world challenges, but there are some challenges as it relates to impact investing — and that is making sure that people understand exactly what it is, that we’re using the same terms.
I understand recently the International Finance Corporation, IFC, a division of World Bank, brought together 58 organizations, banks, insurers, nonprofits, to really create impact principles, to make things a little bit more consistent and easier for the rest of us to understand. You think that will sort of help level the playing field a little bit?
Apicella
These are definitely worthwhile discussions. Every convening is going to get the overall movement stronger, and our group at Prudential, we sort of err on the side of doing rather than talking. And so, you probably haven’t heard much about our impact investment program, but yet I’ve just described to you that it has been around since 1976. We’ll continue to be doing, and we’re happy when the rest of the market follows in our footsteps. (Laughter)
Chris, before we go, there’s a series of questions I keep asking myself that I wanted to offer other people for their own contemplation. What is important? Why is it important? And what are we waiting for? Science? This idea of looking backwards and figuring out cause and effect is known. Innovation? This idea about engineering and design to create a future is here, but our behaviors, our processes for decision making, our acceptance of the status quo, this is what requires our focus.
Let’s get more diverse voices from east to west, from young and old and everyone in-between into the conversation. Let’s be more ambitious and let’s keep the momentum that we’ve had over the last 10 years in impact investing catapult us into a sustainable future.
Hagler
I absolutely couldn’t have said it better myself, Luke. Thank you for that wrap-up. And thank you for being here today and sharing your perspective and giving us a lot to think about as it relates to impact investing and, as you just said, our behaviors and the choices we make. I appreciate that.
There is so much more to consider as we think about sustainable finance. There’s sustainable banking. There’s green bonds. There’s crowd sourcing, alternative deal structures, all kinds of different solutions as it comes to financing the change we want to see in the world, and I think we’ll be exploring that as we look at future podcasts. So, thank you very much for tuning in. And thank you, Luke.
If you want to learn more about what’s going on at Prudential, go to Prudential.com and connect with Luke Apicella on LinkedIn. You can follow me at @chrishagler and EY Sustainability Hub at @ey_sustainable. And please subscribe to this podcast on iTunes or wherever you get your podcasts.
