‘If You Don’t Want to Get Fired,’ Become Serious About Impact Investing

Citing a massive transfer of wealth to millennials, Rehana Nathoo, founder and CEO of Spectrum Impact, says that RIAs must have a firm grasp on impact investing.

Rehana Nathoo (courtesy photo)

Rehana Nathoo

(courtesy photo)

Rehana Nathoo, founder and CEO of Spectrum Impact, believes that impact investing is here to stay — and good for business.

She would know. Nathoo has worked within the Impact Investing and Innovative Finance Programs at the Rockefeller Foundation, and she supported the design of BNY Melon’s social finance program. Then, at Case Foundation, she ultimately led the impact investing portfolio and gave the organization the tools and resources to flourish in the space.

Her advice to private wealth managers: get with the program. RIAs, family offices, and financial advisors need to have an answer when their millennial clients ask about impact investing. Otherwise, they may find themselves out of a job due to the generational wealth transfer in motion, said Nathoo.

Nathoo walks the walk, too. She continues to “pay it forward” when it comes to the women in her own female-led business and in her personal life as well. She sits on the steering committee for Invest for Better, an organization that works with women at all stages of their lives to help bring about meaningful change globally.

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But investors large and small that are eager to embrace impact investing face the same challenges. In an interview with RIA Intel, Nathoo explained how they can overcome those, debunked common impact investing myths, and shared how those investments will shape the future of the wealth management industry.

How did you make your way into the impact space?

I am Canadian born and raised. I moved to the States for graduate school to study development finance and foreign policy. I had every intention of going home and working the foreign policy side, but I wound up working for the United Nations Capital Development Fund, specifically working in East Africa. My mother is from Tanzania and my dad is from Uganda and it was a wonderful opportunity to immerse myself in the places where my parents were from, while seeing how financial instruments work on the ground.

Later, I spent time working for the Rockefeller Foundation, the Case Foundation, and now Spectrum Impact. My biggest takeaway from 12 years of working is this: the constraints in creating long-term impact strategies are identical for huge asset managers, private wealth, and private families. Impact investing can be a difficult fit and I’ve been surprised throughout my career about how similar the challenges are for all types of investors.

What key trends are emerging in impact?

There are three key themes we’re seeing in real time. First is the change in perception around risk. When this all started in 2007-2008 the idea of integrating impact was value-based and there was only a small contingent who wanted to be known for good things in the world. In a post-Covid, mid-climate change world, it’s not that challenging to say that if you’re not aligning with climate you’re missing things at a portfolio and values level.

Second thing is inclusion in multiple ways. It’s gender and race, but it’s also geography. There’s always been this dichotomy. What I deem deeply insulting is labeling countries “first world” and “third world.” Impact Investing is showing us that it is just as likely that innovation is coming from places we least expect it, as it is here at home. A much more honest and generous view of the world is demonstrating that equilibrium in practice. Impact investors are finding innovation in supposedly “unlikely” places.

Third is impact measurement. It used to be that the measurement itself was the goal, but the real end state is measuring the outcome. Impact measurement and management really gets to the “so what” in this space. It will never be gift wrapped and because of that, we’ll probably lose people. It’s difficult in terms of limitations in data capture, the subjectivity of setting and then measuring impact, and the infrastructure gap, but even if we get to a Bloomberg terminal for impact measurement, it’ll never be a traditional one.

If we can accept that it’s hard but doable, that’s the closest we’ll get.

Who is your ideal client?

Investors and allocators putting capital towards impact investing — and that answer is intentionally broad. Our sweet spot is an investor who wants to do impact who says: “Here’s a chunk of money that we want to put towards this and we want someone who can help us deploy the capital.” The client needs a willingness to be an impact investor whether it goes well or not.

Why do you take a strategic approach to impact investing?

Our approach is to design an impact strategy that feeds into the core mission of your organization. Strategy helps jam a long-term approach intro a short-term shaped hole. In the investment world, we are deeply impatient around performance and in some cases, we have to be. In a short-term world, strategy creates milestones and connections to check in to see if something is working. Move away from: “We did it. We fixed it.” Instead, seek indicators to show we’re doing things to lead to better things like gender equality.

We can’t forget the human impact dimension of all of this. We come in and design a strategy and then we leave. Then what? It’s about the current workforce, people at our client organizations that will have to work on it and support it. Impact strategies can be created in a silo and that doesn’t create long-term staying power. Everyone in the organization needs to be activated to do this work, from the newest team member to the very top. When we engage, we give the C-suite the language they need to answer: why we are doing this?

What are a few myths about impact investing that you’d like to debunk?

The two most frustrating ones are, first, the myth about concession. Impact is not inherently concessionary. The risk/return tradeoff is equally relevant in impact as it is in any other mainstream financial instrument. We need to move away from “you will lose your money in impact” to “impact investing, like all things, is about tradeoffs.”

Second one is that it is impossible to measure impact. It’ll always be hard to assign and measure quantitative metrics that demonstrate we’re improving an individual’s quality of life, for example. But we’ve actually spent a lot of time and money - across disciplines to start unbundling that. It’s not impossible, it’s just hard.

Why is impact simply good business?

Look at the big picture. I don’t know many businesses around the world who are not reliant on a strong, independent labor force. Or innovation. Or finite natural resources. Your inputs will get more expensive, they’ll become scarcer, and there will be more demand for you to outperform. All of those things can be protected and preserved by impact. If you’re running a business of any kind in 2021 and beyond, you need impact because you need that full picture.

So what’s the true definition of gender-lens investing?

Like impact, it’s an investing approach and within it there are many tools to use to achieve goals. You’re inventing for financial returns but you’re also considering the impact of your activities and ultimately, how they benefit women — that includes both financial outcomes and social well-being. It has the double bottom line approach.

There are tools to integrate gender analysis in every asset class. In the public markets, you could build investment products by screening out companies that lack sexual harassment policies or adequate family leave policies. In private debt, which is about the access to capital, you could invest in microfinance banks that historically lend to female borrowers, combatting a systemic issue of women not having historical access to bank accounts or fungible capital. Access to actual cash is meaningful. In venture capital and private equity, it could be about assembling a portfolio of companies that are all designing products and services intending to benefit women, in whatever markets they operate in.

In Venture Capital the representation numbers are astounding. Not because they’re non-reflective of the world we actually live in but because they make little logical sense. We know that women founders have been excluded from venture, whether through conscious bias, unconscious bias, or a human tendency to work in small, insular and similar-looking networks. But no VC is actually going out there and saying, “I want to find the next Facebook, the next system-shaking innovation, and in order to do that I only want to see 50% of the best ideas.” They want the best ideas, period.

So when you exclude women from the conversation, you’re missing half of those best ideas. The values behind why we care are truly important. But my personal belief is that shame, ridicule, and finger-pointing is the wrong way to create long-lasting (and real) change. The more we move towards the “what performs” conversation where women founders demonstrate competency, commitment and yes, even outperformance in some cases, the better it’ll be for everyone. The data tells us that the misconception that there’s a gender handicap is just bullshit.

Can you share with us what “impact washing” is and why that poses a danger to valuing impact enterprises and deals?

If you ask 10 impact investors, you’d get 10 different answers. Impact washing is impact after the fact.

Either you intended to invest explicitly for a financial return and you label it impact after it works or you take all of your existing systems — like deal generation — and label them impact without changing any key criteria. That’s impact washing.

The problem with it is that undermines how difficult impact is. We know that the capital markets can’t solve deeply complex social problems naturally. If there were a market-corrected financial solution to every problem, we wouldn’t be talking about any of this. Counting the wins that aren’t legitimate brushes over how hard it is to do this work, glossing over the necessary business of tradeoffs and how challenging that balancing act is on a day to day basis. There’s a risk that we over celebrate impact investing by just taking a win.

Why should RIAs care about impact investing? What’s new for them?

If this is an RIA serving a high-net-worth individual, I would just say that impact is coming. You will get fired if you don’t have an answer to this, either because of the impending wealth transfer from patriarch to matriarch or to the next generation of millennials. Millennials have a much more integrated way of seeing the world. If you don’t want to get fired, have an answer and be serious about impact.

For institutional investors, pension funds, and endowments, the way we have used modern portfolio theory to design portfolios isn’t really working anymore. The market reacts to different information in different ways than it did in the past. What we consider to be correlated or uncorrelated is shifting as industries shift. I actually would come back to the risk argument for that group of people.

For the larger institutions, who are stewards of capital and employers, I don’t think employees will put up with misaligned mission or bad intentions anymore. Younger people won’t stay at a job any longer if they don’t see this change. Company owners think they have time. I understand why boards and CEOs think they have 10 years to slowly steer the ship in a new direction, but the pace of change is much faster than it was before. They could be looking at a talent exodus and wondering what happened.

What are you currently reading or listening to?

My reading is almost exclusively fiction—I’m a massive glutton for literary escapism. Every year The New York Times and NPR put out the best books of the year and I always try to get through both lists. On the impact investing side, Impact Alpha is a great source for content. The Global Impact Investing Network (GIIN) also does some meaningful research on a range of topics. Their reports are thoughtful and technical. I also try and keep an eye out for data around ESG in the public equities markets. That data is really important for making the case for impact.

How do you work with women both professionally and personally?

In my spare time, with whatever that means today, I’ve had the pleasure of being on the Invest for Better Steering Committee, an initiative to bring more women into impact investing. We have everyone from college students to wealthy individuals as a part of this community. Being able to be connect with women who are trying to take control of their financial futures, with impact, is deeply meaningful to me. I’m able to meet investors where they are.

I also teach part-time at Georgetown University. Engaging with graduate students keeps me humble. They have it way more together than I did when I was at grad school. I also lead a team of two other women that I’d be quite lost without. That wasn’t by design. They were talented former colleagues that I had worked with and learned to rely on.

I’ve recently moved to New Orleans and my spouse and I have really gotten into bike riding, which occupies much of our time, as well as eating our weight in powdered sugar.

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