What/How Series (1 of 6): How Do You Measure Return?
When I spoke with Charlotte a few weeks ago, she asked me why I was so positive in light of the stock market’s 20% fall in the first quarter. I told her that I was excited to think that investors might look through the decline and realize that their wealth could be deployed in real investments, in the real economy to both earn a financial return and have a positive impact on our lives and our planet. I don’t think she was very impressed with my answer.
Mission aligned investors seek to improve the wellbeing of people and the planet while generating financial returns that meet a targeted goal. Our conversations with these investors get especially interesting when we talk about measurement. A focus on measure invites us to consider new ideas and approaches.
While the financial markets provide a very clear measure of financial return – an investor in the S&P 500 Index lost 20% of her money during the first quarter of 2020 – there aren’t price signals for the formation or consumption of civic, environmental, and human. We have learned from investors that non-financial returns are defined by terms that are highly subjective, require long duration assessments, and inherently imprecise. We also recognize through our work with communities - an idea/investment theme, a place or a group of people – that each community’s measure of return is a critical component of any evaluation. How then can we effectively integrate an investor’s subjective return goals with a community’s defined goals (which are “objective” to the investor)?
As a prelude to answering that question, let’s consider how conventional thinking has shaped our views about measuring non-financial return. Let’s consider measures in the context of private investments, where we forfeit liquidity to generate outsized financial and non-financial returns compared with public market investing. The first convention that obstructs alignment between the investor and community is power – who has power, the investor or the community? TILT clients seek to develop “agency partners”: people who can define the community’s priorities. We work with the leaders to establish common measures that define a successful investment. An investment in an enterprise that doesn’t regenerate the capitals that are in deficit, as determined and defined by agency partners, is not successful. At the same time that we anchor our illiquid measures with a community view, we consider all of our investments - public market and private ones - through the Sustainable Development Goals (SDG’s) framework. Just as each investor has a unique subjective perspective and a community has a unique set of collective goals - the global “crowd-sourcing” that defines the SDG’s provides a useful lens for us to build our multi-capital investment framework.
The second convention that distorts effective measure is every human being’s embrace of relative performance. Long before the Medici families competed with the Borgia families, we humans have sought the status defined by words like: good, better, and best. Investment results are defined in these terms. “Good” managers outperform benchmarks and peer universes; “better” managers have top decile returns over decades. While measuring financial return to the basis point (1/100th of a percent) is standard practice, measuring how an enterprise regenerates depleted capital stores in a community is less precise.
Mission aligned investors complain that it’s very hard to get “good” data on non-financial return. Perhaps this is because we are asking for the wrong information.
A great deal of important work has been accomplished by groups around the world. Here in the US, the Global Impact Investing Network (GIIN), including their IRIS+ taxonomy, have promoted rigorous data and data analytics: “Credible, comparable impact data are needed to inform impact investment decisions and drive greater impact results.” Our colleagues at Tideline have released an analysis that calls investors to verify the integrity of this data: “to build consensus around the essential features of impact investing and create standards against which investor practices can be evaluated.” While TILT views the GIIN and Tideline as indispensable allies in the movement to shift investor attitudes and behaviors with regard to integrating financial and non-financial returns, we take a different approach.
Rather than focusing on the good managers or the better managers, we want to be the best partner with our clients and with the communities in which they want to invest. Our approach is grounded in absolute returns - not relative ones. We work with our clients to first align their goals with the community: a multi-stakeholder framework. We then apply a multi-capital investment process to evaluate how each investment creates a positive or negative impact in the community. This analysis occurs at both the enterprise level and at the portfolio level. The returns are measured on absolute terms that express the unique alignments that both our investors and the communities are seeking. Where commingled investment structures strive to meet a collective goal, TILT manages unique portfolios to achieve unique client and community goals.
TILT shares values like discipline (a rigorous investment process), accountability (defined with the communities where we invest), and comparability (a commitment to transparency and collaboration). We don’t aspire to outperform benchmarks. Rather, we seek to achieve our clients’ investment goals AND improve the well-being of people and the planet. To quote from Tideline's report, we agree that COVID -19 has “exposed and exacerbated the fragile, inequitable, and unsustainable nature of our social, economic, and environmental systems.” While we are joined in a commitment to achieving positive outcomes that improve the world we live in, we are offering a different approach.
If we simply seek to achieve a relative ranking of “good, better or best” – will we regenerate the critical capital that is required to forge sustainable change in our communities and in our world? What are your goals, and how important is the status of your relative standing in accomplishing these goals? We welcome your views and opinions to these important questions; please join the conversation.
Realizing that I hadn’t made much of an impression on my 24 year old daughter making $13.25/hour as a nurse’s aid – I decided to quote Rumi:
“For years, copying other people, I tried to know myself.
From within, I couldn't decide what to do.
Unable to see, I heard my name being called.
Then I walked outside.”