In a previous post we postulated that perhaps the time has come for impact investing to embrace a three-dimensional approach: justice, prudence, value creation, or JPV.
Perhaps you experienced a nearly reflexive objection: not another acronym or system! We had that reaction, too.
We’re well aware that the impact investing world already has a superabundance of acronyms, and no one — including us — is clamoring for more. Besides, ESG is just barely gaining traction as an accepted standard. Do we really need to to press for something new?
Yes and no.
Yes.
ESG (environmental, social, governance) focuses investors’ scrutiny on three important axes or arenas of corporate function. It is particularly helpful for investors seeking to evaluate publicly traded stocks for their underlying risk and value. ESG screening criteria are not exclusively employed by impact investors, either: a colleague from a large mainstream investment firm confided to me that while his team would never publish their use of ESG criteria, nonetheless they employ ESG lenses to suss out whether publicly traded companies are practicing prudent forward-looking decision making. Those companies not paying appropriate attention to ESG factors are understood to be carrying higher than market-acknowledged risk. Conversely, those companies paying appropriate attention to ESG factors are understood to present lower than market-acknowledged risk.
So ESG (and GIIRS and other specific rating systems) are quite useful, and we believe will continue to become still more useful, both as reporting and analysis capabilities increase, and as adoption expands.
And we also believe that there is also a strong case to be made for progressing to new and more comprehensive — or at least complementary — systems that can extend beyond ESG.
First, ESG is most relevant for publicly traded stocks; it is much trickier to apply to private investments. Impact investors making private capital placements need lenses better suited to the task at hand.
Second, ESG is most effective at drawing attention to three axes or arenas of corporate behavior — environmental, social, and governance. While this is helpful, impact investors also need lenses that are effective at drawing attention to larger contexts and broader consequences. Impact investors need more comprehensive views into unquantifiable and narrative arenas where ESG doesn’t easily reach.
This is of course a topic for much longer discussion. For the purpose of this post, suffice to say we believe there is cause to press on beyond ESG, to define and adopt other new impact investing lenses and approaches.
And no.
Our JPV (justice, prudence, value creation) postulate is actually not new at all. In a very real sense, we are proposing something which is ancient indeed. It has simply been temporarily forgotten by our present-day market system.
In his Rhetoric, Aristotle posited that in order to be fully persuasive an argument requires logos, ethos, and pathos. An argument — or, for our purposes, an impact investment case — which lacks one or more of the three is simply incomplete. Simplifying greatly, logos is the logical argument, appealing to reason; ethos is the credibility of the speaker, appealing to authenticity; pathos is the emotional force of the argument, appealing to human connection. How many of our impact investing conversations fully engage all three, combining a financial case with authenticity or alignment and also emotional force? Some do, particularly in the PRI (program-related investing) and MRI (mission-related investing) realms. How much sharper could investment committee decisions be if they explicitly required logos, ethos, and pathos of all potential impact investments?
More contemporaneously, Tom Bird’s formula of alpha, iota, and chi frames a similar set of criteria for a fully persuasive impact investment. In Tom’s case (again, simplifying greatly) alpha is financial return, without which the transaction doesn’t qualify as an investment; iota is the intended / confirmed benefit, without which the transaction doesn’t qualify as an impact investment; and chi is the personal satisfaction he derives as an investor, without which even the highest-returning impact investment rings hollow. For Tom, a worthwhile impact investment by definition must provide all three. This is of course highly congruent with Ed’s recent Ed Talk on Re-learnng to value what is priceless. As Ed so eloquently shared, even the most veteran impact investors can forget and have to rediscover this insight.
Arguably either logos, ethos, pathos or alpha, iota, chi is already sufficient, without need of another new formulation. If either of these works for you as an impact investor, we encourage you to take it up without further thought about JPV.
So what?
We postulated JPV (justice, prudence, and value creation) as a system by which to focus on the context and consequences of Reinventure investments.
We defined justice as addressing questions of fairness or inequity; prudence as delivering positive financial and economic consequences; and value creation as generating wider perfusion rather than tighter concentration of wealth. These may sound quite idealistic, but Ed’s record at UNC Ventures demonstrates that they can also generate attractive LP returns* — and specifically that value creation includes fund LPs; it doesn’t have to come at their expense.
JPV is a triad which we believe differs in small but important ways from alpha, iota, chi; logos, ethos, pathos; ESG. And it is also nothing new at all: a perspective which reaches back to the ancient world. In all candor we may or may not keep using it — that will depend on how well it serves our own investment decision making, and our conversations with our thought-partners, colleagues, and fellow practitioners. However, our deeper point stands. Namely, that as impact investors we have the opportunity and the obligation to bring all of our faculties to bear in making investments which are truly beneficial to all parties, and fully compelling on all axes.
If we accept that our economy and our civil society are imperiled by increasingly extreme inequity, that the only source of growth in our economy at present is young growing companies, that founders of color and women are steeply disadvantaged in raising capital to grow otherwise promising businesses; and if as impact investors we seek both financial and social return, then we believe that Reinventure has a fully persuasive case for investing behind founders of color and women.
In short, we believe the Reinventure investment thesis embraces logos, ethos, and pathos; alpha, iota, and chi. It comprises justice, prudence, and value creation. We believe these are the hallmarks of a fully compelling impact investment proposition, with or without an acronym.
Please share your thoughts with us: What constitutes a fully compelling impact investment proposition for you? What axes, arenas, outcomes, consequences, and returns are you contemplating? Does JPV offer any illumination to your investment thinking? Do you prefer alpha, iota, chi; logos, ethos, pathos; ESG; something else? Most importantly, how might we join forces to amplify all of our efforts?
At Reinventure, we’re reinventing investing. We’re proud to be in extraordinary company with others who are also reinventing investing to create a more just and equitable future for all. Please join us.
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*While there’s no such thing as a guarantee in investing and no one can reliably predict the future, Ed’s record at UNC Ventures provides some historical evidence that it is indeed possible to invest for both financial returns and justice, prudence, and value creation. To learn more, please contact us.