This weighty academic tome tells you everything you want to know about the theory of impact investing, but less about the practice. It warns impact investors are overlooking human capital.
In short
- This is not a ‘beach read’ but may belong in your library. Dip into it rather than read it cover to cover.
- The approach is very academic. No doubt this will one day be a coursebook for those taking degrees in impact investing.
- The most interesting argument is that impact investors neglect human capital at their peril.
The Global Handbook of Impact Investing: Solving Global Problems Via Smarter Capital Markets Towards a More Sustainable Society. The title is already a mouthful. This is not a ‘beach read’.
It is a massive tome of 1,250 pages and fifty plus authors. These are organised by two editors from very different backgrounds, perhaps representing the two ‘magnetic poles’ that guide the thinking in this book – business and academia.
The first, on the more academic side, is Elsa de Morais Sarmento of NOVAAFRICA business school in Portugal. Paul Herman, an investment manager and founder of HIP (Human Impact + Profit) provides the business nous.
This academic approach means that the book is long on theory, and has a repetitive feel to each of its thirty chapters, including lengthy references to give weight. It will definitely become a coursebook for any future degree a university offers in impact investing.
This comes at a price, in terms of accessibility. At one point, about 620 pages in, we are even treated to the kind of algebra that would not be out of place on Einstein’s blackboard. I’m not convinced it tells us much about the intended subject of impact measurement.
However, the book makes a strong case for investing in human capital and gender lens investing.
Invest in human capital
Paul Herman’s own contribution, helped by Kirstin Dougall, a Stanford researcher into sustainability, does a lot to tell us “Why impact investors should care about human capital valuation” at their investees.
As they state, “while it is common for impact investors to seek investments with appealing environmental and sustainability characteristics, the value of people and the workforce as a whole – the human capital – is often overlooked.”
It is interesting that they are essentially adding to the attack in recent years on management consultancy’s previous output, which too often led boards and CEOs to obsess with employees simply as cost centres that must be constantly pared.
I think of Jack Welch’s philosophy at GE, which was that 10% of his employees would be sacked every year, to keep everyone on their toes.
Rather than just being irritating costs, Herman and Dougall point out: “Employees invent products, serve customers, and operate teams, and thus directly contribute to top-line revenue.” They give us a real example of what impact investors can do to take this on board.
How to value human capital
They also give us a handy ‘investor’s action plan for human capital valuation’. This theme is taken up by Rajen Makhijani, a distinguished Indian consultant and coach.
He focuses on how important leadership is to the success of businesses, citing a Harvard study that suggested 14% of a company’s performance can be attributed to the CEO alone. Another study suggested that 50% of a company’s reputation is linked to the CEO’s reputation.
Makhijani argues impact investors must therefore concentrate on “leadership development across the investment life cycle.” In practice, this means pre-deal due diligence, and then re-assessments immediately post investment and six months and two years in.
‘Uncovering alpha’
Also within this human capital dimension are several essays on gender lens investing. Kristin Hull – the woman who founded Nia Impact Capital – shows us how investors are “uncovering alpha previously overlooked.”
She marshals considerable evidence to support her case, some of which will be familiar to gender lens investing enthusiasts, but much of which will be new. A lot of this is thanks to the Boston Consulting Group’s work on how diverse leadership teams boost innovation.
Three female authors, Rotondaro, Calvacinti and Correa give the reader an interesting case study of “gender lens investing in Latin America – the case of Pro Mujer.”
They argue that “top women executives are necessary to balance power and promote new work environments.” And give us the ‘out of the box’ thought that maybe every company should have two CEOs. One male, one female.
Interesting ideas like that are what make the considerable effort to read this book worthwhile. Otherwise, some finance practitioners might be put off by the academic style.
