ImpactPHL

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Volume 59: Impact is the Metric

Dermot Murphy

About ImpactPHL Perspectives:

ImpactPHL Perspectives is a multi-part content series that explores the many facets of the impact economy in Greater Philadelphia from the perspectives of its doers, movers, shakers, and agents of change. Each volume is written directly by a leader in this space, to discuss best practices and share lessons learned while challenging our assumptions about financial and impact returns. For more thought leadership like this, check out the full catalog of ImpactPHL Perspectives.

Jason Ray, Founder & CEO, Zenith Wealth Partners

Investments and philanthropy were once viewed at opposite ends of the use of the capital spectrum for capital providers and investors. As impact investing has emerged as a viable way to blend investment and philanthropy to tackle society’s largest problems, interest in it has grown substantially over the last decade. Investing to solve big problems while generating profit has grown into a $1.1 trillion market over the last decade.

“Suppose impact investments are held to different success metrics than traditional, profit-seeking ones....”

Profitability metrics are simple in financial terms, often measured by the rate of return, cash flow, or risk-adjusted return. On the other hand, solving problems is more difficult to define metrics and measures. This creates a headwind for the impact investment industry as participants cannot establish consensus for the wide array of definitions for impact investment success.

Suppose impact investments are held to different success metrics than traditional, profit-seeking ones. In that case, they will not transform society in the ways necessary to create a more equitable future.

The US equity market has around $50 trillion in market value. Last year (2021), the US Gross Domestic Product (GDP), which measures the value of goods and services produced in the economy, was $23 trillion. Extraction and greed have been key ingredients in disparities by race, gender, and sexual orientation, along with climate crises and poverty. Eliminating these issues would not only create a more just society but would also create more economic value. Reducing racial wealth inequality could add trillions to the US economy alone. Further, implementing specific climate change initiatives could add trillions of dollars to the economy over the next few decades. Investments seeking to extract financial value that damages either justice or the climate will likely be outperformed by investments seeking to create equity value and solve these issues. The measurements of outperformance include both financial and societal outcomes.

“While philanthropic capital metrics are important, the amount of capital the sector deploys is not large enough to address society’s issues.”

Measurement is critical for any capital provider or investor to evaluate the effectiveness and efficiency of their capital to create the return, change, or other objectives. Investments are measured using financial metrics – the rate of return, volatility, Sharpe ratio, etc. Many of these universal metrics have been accepted by almost all forms of investors for decades. Investments have more effects than just financial returns, though. Those that receive and manage investments also receive the power to use capital to operate businesses, capital projects, or other risk-focused engagements. In many cases, the capital provider provides capital to the manager because they believe the manager will be a good steward of capital and generate an acceptable return for the provider.

For example, Zenith Wealth Partners advises individuals, families, founders, and institutions on raising, managing, and allocating capital. The firm was founded to address racial and gender wealth inequality by delivering equitable advice. Since inception, clients have provided vital feedback that has inspired reflection on continuously improving our investment process. Through primary and secondary evidence, we are convinced that diverse leadership teams focused on solving society’s most prominent issues will create the best investment outcomes. Our client base reflects and identifies with this charge. They are learning alongside our journey to blend investment and philanthropy for the benefit of all.

As another example, Vanguard is a financial services behemoth in the Philadelphia area. They sponsor a mutual fund, among many others, the Vanguard Total Stock Market Index Fund, which is the largest fund in the world at the time of this writing. Investors typically provide capital to this fund to accomplish three things:

  1. Gain exposure to the US stock market’s financial returns

  2. Realize a low tracking error percentage to the fund’s benchmark

  3. Pay a competitively low expense ratio compared to other funds in the market

Like an investment capital provider, the philanthropic capital provider often provides capital to program managers they feel will steward the capital positively and generate an acceptable outcome for the philanthropy. Philanthropic capital providers also evaluate metrics when they extend grants to mission-aligned projects. These metrics are used to evaluate the effectiveness of the capital, the execution of the program, and whether the philanthropic capital provider should continue providing to the program.

Some things those philanthropic providers use to evaluate a grant are:

  1. The project’s purpose and desired outcomes

  2. Demographic profile of the program’s intended audience

  3. The project budget and overhead expenses

While philanthropic capital metrics are important, the amount of capital the sector deploys is not large enough to address society’s issues. The direct value of philanthropy was measured at $550 billion in 2021. Investment dollars need to be repurposed to have the amount of capital necessary to create change in society. The example metrics provided above for philanthropic capital providers have not been able to attract investment capital that requires a financial return. It is unreasonable to expect investors to accept concessionary financial returns while taking on investment risk due to investor goals, objectives, obligations, inflation, and a general need for equity value increases in the future.

“Those impacted should define the metrics, as they are the closest to the problem and likely the most well-suited to execute the solution.”

Investors should demand a financial return on their investment, but they should not define philanthropic metrics for impact investment opportunities. Most investors are not currently impacted by identity disparities or climate change. Those impacted should define the metrics, as they are the closest to the problem and likely the most well-suited to execute the solution, provided there is capital for them to do so. It will be difficult for groups seeking to establish widely accepted impact investment measurement frameworks. The definitions of justice and sustainability can be applied in many ways, in varying situations, and at various times. The best monitor for success will be the population that is impacted by the investment, along with the financial return.

For example, Phirst Market Ventures (PMV) is an early-stage venture fund that seeks to create a $100 million exit for a woman of color founder. Around 40% of startups receive their first funding from friends and family. Black women face a significant wealth gap in society, so PMV seeks to provide them with early-stage capital. We believe there are positive trends fueling black and brown women to create optimal financial and societal outcomes. The Zenith Wealth Partners team and I have enjoyed building this solution alongside Tanya Morris at Mom Your Business and Diane Cornman-Levy at Women’s Way. Learn more about PMV's effort to fuel the Philadelphia region's next $100 million black woman-founded business.

Interested in learning more?

Accredited investors are invited to ImpactPHL's newest initiative, OptImpact, to learn more about Phirst Market Ventures and over $170 million of other local impact investing opportunities.

Jason Ray is the Founder & CEO of Zenith Wealth Partners. Zenith is an investment management and advisory firm in Philadelphia. Jason previously worked at Carnegie Wealth Management, FS Investments, and Lincoln Financial Group - all in client-facing wealth and asset management roles. His skills include portfolio management, investment analysis, business valuation, and leadership.

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