We interviewed industry thought leader Steven Godeke, who shares his thoughts on impact investing with us.
Steven Godeke is an independent investment advisor who works with foundations, corporations and individuals to integrate their financial and philanthropic goals. Since 2001, Steven has advised clients on the creation and execution of impact investment strategies across asset classes and program areas. His clients include The Rockefeller Foundation, Robin Hood, The Robert Wood Johnson Foundation, The Conference Board, The F.B. Heron Foundation, The John D. and Catherine T. MacArthur Foundation, Business Enterprises for Sustainable Travel, The Altman Foundation, Common Ground, The World Economic Forum and corporate clients in the financial services and pharmaceutical industries.
How do you define impact investment and what does it mean to you?
Impact investing is a strategy where investments are made with the intention of creating environmental and social impacts in addition to some level of financial return. I see impact investing as an essential tool to help address some of the world’s most challenging problems.
How did your career lead you to focusing on impact investing?
I grew up on a dairy farm in Southern Indiana where I got first hand experience in the challenges of family farming. I also saw how our community disappeared when a large coal company came in and strip-mined the land around our farm. This first got me thinking about the real environmental and social costs of our energy consumption.
After studying public policy and finance in the U.S. and in Germany, I started at Deutsche Bank with the intention of focusing on international infrastructure projects, but eventually found myself working on less interesting large corporate transactions. When I left Deutsche in 2001, I decided to explore how I could apply my finance expertise to social and environmental issues. I have since built an advisory firm which works with a range of investors to make impact investments. My clients range from foundations working in education to individuals interested in sustainability.
Do you see impact investing as a new asset class?
I see impact investing more as a strategy than an asset class. However, since we all want more capital to be invested to create environmental and social impacts, it may be useful to describe impact investing as an asset class in order to slot it into the allocation frameworks of institutional investors and the product development machinery of Wall Street.
Where do you envision the impact investing space will be in the next five years?
At present there is a heightened awareness of the concept and the idea has been disseminated. My vision for the next 5 years is that we move from awareness to allocation of capital. I look forward to seeing significant amounts of capital being placed within the framework of impact investing. I also hope to see new models and more funds emerge, and as a result more opportunities to participate in impact investing.
What is the ideal relationship between impact investing and philanthropy?
I view philanthropy and investment as very similar activities—they both use money to generate results. However, philanthropy and investment remain two separate fields with very different mindsets and motivations. There are lots of possibilities for misunderstanding and miscommunication. The challenge we face is how to braid together these different elements through impact investment to create sustainable positive impact. For example, I have worked on an affordable housing fund where philanthropists put in grant money that was then leveraged through investor dollars. The ideal mix of philanthropy and investment depends on the context, and should be structured to achieve a given goal.
To what extent are investors willing to give up yield and/or profits in return for the second and third bottom lines?
I don’t think of this as a tradeoff; sometimes investors are looking for a risk-adjusted return, but sometimes they may be willing to take a below-market return in exchange for additional social or environmental benefits. Impact investors and philanthropists should be very clear on what they are trying to achieve and how they are trying to achieve it rather than thinking that they can make the world a better place by accepting lower rates of return.
What is needed for impact investing to be “successful” and how do you define success in this context?
Success would be substantial capital allocated for impact investing—I believe 5% of available assets under management would be a great accomplishment. Another key to success will be enabling investors to accurately measure the social and environmental impact that they are achieving.
With respect to social and environmental performance measurement, (a) To what extent do you think investors are/will be demanding this and (b) Do you think that we will ultimately be able to come up with something meaningful and user-friendly?
A lot of people are talking about social and environmental performance measurement, and some are measuring it for their portfolios. My hope is that these measures will begin to drive future investment decisions. I see this evolving into a practical decision tool rather than a social science evaluation tool. I believe this is achievable, but will require a lot of work. One of the central challenges is quantifying and comparing impact across sectors. The initiatives that are out there right now are a great start. However, you not only have to create the structure, but you also have to create the incentives for people to use them. Ideally, the participating companies and organizations will find that reporting impact will make it easier to raise capital.
Which sectors do you feel present the most promising double and triple bottom line investment opportunities among the social and environmental markets?
I believe that there are very promising opportunities in sustainable investment in our increasingly resource-constrained world. I also think that investment in commercial education providers in emerging markets is a growing opportunity.
Which types of investors do you think will play the largest role in the growth of these markets?
I think it is actually the asset owners—family offices and High Net Worth Individuals who can be very innovative and can make early stage impact investments. This is because the personal connection is there, and they can execute without having to work through the hurdles of a large institutional investor. However, the bulk of investable capital is located with the institutional investors, who should be able to participate at large scale, but may not be in a position to do the innovative, early stage investments. Eventually structures will be created to facilitate participation by these larger institutions.
How do you see your own current and future role in contributing to the growth of impact investing?
My goal is to grow my advisory firm by helping investors find impact investment opportunities across a wide range of sectors and to work with them to transform their intentions into executable investment plans. I also teach an impact investment course for MBAs at NYU Stern through which I would like to help create the next generation of impact investment bankers.
How do you see Mission Markets fitting into the big picture?
What is really exciting about Mission Markets is that it is part of the market infrastructure. The Mission Markets platform has the potential to be very powerful, because it helps issuers and investors find each other. Creating a marketplace is key. Part of the challenge in developing an impact investment marketplace is that the role of market makers such as Mission Markets is more than just matching up bid and ask quotes—it requires education and connecting people.