This post is a summary of my thoughts from a panel I participated on at the 2015 Social Finance Forum on November 12, 2015 in Toronto. Climate change is a big problem, and it requires big money. The World Economic Forum concludes that an additional (above-business-as-usual) $0.7 trillion USD per year in clean energy investment is required to transition […]Read More ›
Interview: Paul Herman, the HIP Investor
I recently had the pleasure of interviewing investment adviser and portfolio manager R. Paul Herman, pioneer of the HIP (Human Impact + Profit) methodology and author of The HIP Investor: Make Bigger Profits by Building a Better World. Paul invented HIP in 2004 to connect investors seeking positive human, social and environmental impacts and seeking financial returns with investments designed to deliver those intended results. Paul shared his insights and thoughts on constructing an impact investing portfolio as well as his most practical solution for investors to start thinking about this process.
1) What are you most excited about right now in the impact investing world?
I’m really excited about investor demand. Impact investing is slowly becoming recognized by investors of all types – from entrepreneurial individuals to multi-generational families as well as the institutional investors, and fund managers. There is also increasing potential for investments across all asset classes ranging from fixed income to equities, including preferred stocks, and real estate. No matter what type of investor [you are] and investing you do, there is not just a risk-return profile anymore but a risk-return-impact profile that more investors are considering and setting goals towards, like “100% invested for impact by the year 2020”.
2) In your experience, how do we shift the conversation for institutional and individual investors to recognize the importance of impact in their portfolio given that socially responsible investing has been around for decades? Is it through: education? Investment workshops? Alpha generation? Track record?
The conversation shifts when we change investor’s mindsets. When investors see value to what is meaningful to them. I believe that integrating impact investing into their investment policy statement or making an investing pledge is essential. Once you are committed to exploring this, you can look into your diligence criteria. One of the key things to remember is that whenever you evaluate fund managers and investments, you should constantly evaluate whether this matches your own personal criteria. The biggest challenge currently is that traditional investment managers and advisors are still skeptical of impact investing. They don’t easily hear the evidence, see the alpha generation already present and value the live track record. They still have assumptions that it is like the older socially-responsible “negative” screen instead of positive criteria – from employee engagement to fuel intensity to staff diversity — that drive business value. Therefore, it takes the investor to influence and ask their advisors how to address their social impact factors and be willing to move their money if the advisor doesn’t listen.
3) Diving a little deeper into your portfolio construction process: What is the most meaningful information that can help you determine how much of an impact a company is actually having?
There are three categories that the HIP methodology evaluates:
1) Share of products and services that have a net positive impact
2) Meaningful quantitative metrics of impact and potential profit. At HIP, we use five categories to determine this impact and potential– Health, Wealth, Earth, Equality and Trust – or more specifically, core metrics include customer satisfaction, employee engagement, greenhouse gas emissions, gender diversity, and certifications.
3) The management systems and practices that embed sustainability into the business vision, metrics, accountability and decision making.
4) In portfolio constructing using the HIP scorecard, what is the HIP cutoff score for the company to be allocated in a portfolio? Or does a lower HIP score mean a lower weight allocation?
We believe that every company can have an impact rating from a low of zero (0) to a high of 100. In terms of how we have chosen to apply this rating, we’ve developed a scorecard at HIP. HIP evaluates companies in three areas: quantifiable human impact, sound management practices and sustainable products and services.
When you use consistent criteria across all investments, even when you hold a small percentage of a ‘less impactful’ company (such as holding a S&P500 index), you can then be more engaged in the company by actually putting active pressure on the company – talking to the company and encouraging them to look at the meaningful sectors. A portfolio that does this invests more heavily in companies with higher HIP scores, and lower weights in lower HIP scores.
5) Given the diversity of approaches and goals among investors and initiatives, not to mention the difficulty in comparing metrics across this field, what practical solutions might there be to achieve scale and preserve impact?
The most practical solution would be for investors to start declaring their impact goals. e.g. “100% invested in impact investing by 2020.” This allows their investment advisors to write it into an investment policy statement and gives both parties a goal to work towards. Investors should use this goal to build their portfolio’s criteria and integrate it into their risk and return profile. This is where you start the conversation with companies, portfolio managers and fund managers.
There is strength in us joining together and voting with our money – if we speak loudly with unity, investment managers will begin to listen to the money moving.