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Why Vikram Gandhi, Creator of Harvard’s Impact Investing Course, Hopes to Stop Teaching It

The investor and HBS lecturer shares how he developed the first curriculum for impact investing, and how he’s convincing a new generation of students that good risk adjusted financial returns, and a positive difference in the world, are not mutually exclusive.

A decade ago, after 23 years in investment banking at Morgan Stanley and Credit Suisse, Vikram Gandhi wanted to do something different.

“I figured why not try and combine my business skills and my finance and my investing skills, which I'd developed over that period of time, with this whole thesis that doing good and doing well are not mutually exclusive,” he said.

He co-founded Asha Impact, an impact investment firm and platform, and started VSG Capital Advisors, a company that provides strategic financial and investment advisory services in the private and social sectors (the Canadian Pension Plan Investment Board and others are clients).

But Gandhi wanted to do more.

An alumnus of Harvard Business School, Gandhi discovered there were no classes in the program dedicated to impact investing so he helped create one. This spring, he’ll be teaching “Investing - Risk, Return, and Impact” for the fifth time. 

In an interview with RIA Intel, Gandhi shared what the case study-driven course will cover (it changes every year) and why he hopes, one day, it won’t exist.

Tell me a little bit about yourself. How did you end up teaching at Harvard?

I'm an alumnus from HBS, so I was spending quite a bit of time on campus. I got talking to the dean who I knew, as well as the head of faculty development, [and said to them] "This is what I'm doing. Do you guys have courses like this at HBS?" And they said, "We do little pockets here or there, in some of the other courses.” 

Well, if I'm going to have impact and make a difference, wouldn't it be fabulous, in addition to setting up a fund and helping with government policy, et cetera, wouldn't it be perfect if I could develop something and basically teach it to some of the brightest minds in the world who will be leaders in the future?

One thing led to another, I teamed up with Shawn Cole, who's a tenured professor in the finance department. And then we spent basically two years preparing because there were no [impact investing] case materials at Harvard Business School. We wrote nearly 25 cases between us over a two-and-a-half-year period. Now, it's a full credit course as an elective in the MBA program. And that's what I will be teaching for the fifth time this coming spring. 

That's how I got there and it's been a fabulous journey. Then one thing leads to another. You're doing that and then they ask you to do something else. So, now I teach a required course called Leadership and Corporate Accountability, in addition to the sustainable investing course.

Tell me some of your observations of the impact investing space, especially prior to 2012. What have you observed and what's been going on since then?

The whole aspect of impact investing — that you can make investments, get the risk adjusted financial returns, and be making a difference — really started getting coined in 2007, when the Rockefeller Foundation and the Kellogg Foundation started talking about this. 

But it was kind of an unheard concept, untested. The initial investors really were, what I would call, these development financial institutions and family offices, who actually believed that this would be great. If I can get a good return, and my money is making a difference, why not? And that's not changed. I would say that it continued to grow until about 2016 or 2017, at a pretty steady clip. It started with a few billion dollars, and today that private side is about a trillion dollars invested in the market.

It really became more institutionalized in the last four or five years, when some of the large private equity funds also started launching impact funds. There was now more and more of a track record that you don't actually have to lose returns and have it back at the same time. Then once these guys came up with larger funds, now you have institutional investors investing in it. They're global in nature. They cut across industries. And they're growing at a pretty fast clip.

But, in the big scheme of things, a trillion dollars compared to the size of the financial markets is still pretty tiny. I think the growth will continue at a pretty hard clip, but it's starting from a small base, so even a big growth rate is adding only a couple of hundred million, or three or four hundred billion dollars to the market.

ESG, I think in the public markets, has really taken two forms. One is, people just saying, “I don't want to be in gun stocks, or tobacco stocks, or alcohol stocks, or stocks which are not consistent with my religious beliefs, and their various other filters.”

I'm also finding that, for large pension plans, insurance companies, endowments, if you have a long-term time horizon, which they do by definition, you can't not factor in climate risk, and societal risk, and bad governance into your investment process. This whole area of integrating ESG into the investment process has really caught full steam. It's pretty much done by most large institutional investors.

And now the fourth thing happening is that if we invest sensibly, and find companies that are doing ESG, or focusing on the right ESG factors, that could be a source of long-term value creation. Or we can find companies that are not doing it well, and then influence them to change, a little more activist, that there's potentially a large alpha opportunity there.

This is an irreversible trend. And there'll be negative things people talk about, like greenwashing. And there is some of that. But let's not let not perfect be the enemy of the good. There's a lot of really good things happening out there. And I continue to see that this trend will continue to happen.

I want to talk about the course, Investing — Risk, Return, and Impact. What is the course like? How did you decide on the syllabus? 

It's a finance course, which brings in sustainability and impact into the investment process. That's the basic thesis behind it. 

If you look at investing, traditionally people focused only on return, maybe 75, 80 years ago. Then they said, "Well, if I have returns in four different categories, of which have different risk profiles, I should be getting different returns." And then risk was brought into the investment process. And now we are, in addition to risk and return, bringing impact into the investment process equally. That's why it's called Investing — Risk, Return, and Impact. How can we educate students on thinking about impact and bringing it into the investment decision?

We have a big module on the private market. We have a module on impact measurement; how different firms measure impact and how do they define impact. And how does that actually work?

[And] different cases on different methodologies that exist so students can see what's already out there, what the future trends are, and compare and contrast different impact measurement methodologies.

Then we have a module on public markets; what are the different funds out there that are investing in public markets? How are they thinking about it? Right from this whole issue of positive screens to trying to generate alpha.

And then, the last piece really is, where are we going from here? And what is the role of large financial institutions? There are two buckets of impact investing. One is just bringing an impact into the investment process. We also touch upon the fact that by bringing in impact measurement and improving it, can we make charitable spending and development spending by governments that much more effective? Because you're bringing in capital markets and financial types of instruments into the investment, into the charitable process. So therefore, your return on social capital is going up. And we talk about that as a future trend.

It's all case-study method. Typically, 90 percent of the classes, the person that we've written the case on is in the class, they hear the discussion. And they'll hear the discussion between the students, the debating, contrast, and comparison. And the HBS students don't hold back just because they're the guest sitting over there. Then for the last 20 minutes, they'll comment on their experiences, comment on some of the comments which are made by students in the class. And then, we've got basically a Q&A kind of thing. And we have a whole range of cases, too. A variety of large companies, small companies, big asset managers, asset owners, non-profits, the whole spectrum.

Has there been much evolution of the course, even in just a relatively short amount of time?

Yeah, I think. Every year we write three or four new cases, because there's a new impact measurement tool that's come out, or somebody is launching a new fund, which will be really interesting to talk about. We'll be writing three or four new cases right now. Again, this is an investing course which brings an impact, so there'll be some basic learning, which, regardless of when you write the case, it's kind of evergreen. But otherwise, every year we write about new situations that are going on right now.

I'm writing a case — since it's not published, I can't talk about the name but it's about one of these large activist ESG opportunities. That's really not happened before; public investors are getting more and more important and more engaged with managements and boards, and how to change the direction. 

I'm writing another case on a large global energy company that has a corporate venture capital arm investing in technologies that would disrupt the basic business model. 

How should one think about that from an impact perspective and a broader business perspective? We've now written a case this last fall, because BlackRock has launched a whole bunch of new strategies around impact, particularly in the middle market, in a more active approach rather than just the ETF side. So, we wrote a case on that. We are constantly writing new material. That's just the way it is.

What has demand for the course been like? Has that also been changing?

Initially, people were wondering what this was. But I think now, I mean, everyone is talking about ESG impact. And again, the trend among students, the Millennials and now some of them are Gen X as well, is that they don't think these are mutually exclusive things. And so, there is a growing interest.

The other interesting thing is that a lot of the things that we teach, and this is a specialized course on sustainable investing, but in a lot of the other finance courses or leadership courses, other professors are bringing in impact into the equation. Like, what is this doing for value creation? What is this doing for stakeholder capitalism versus shareholder capitalists? So, the theme here is that it's spreading across everywhere.

What does that mean for you and high-level education? Do you think there are more opportunities for more courses that are perhaps more narrowly focused? Or do you see the impact element of this course just becoming an element of all finance courses?

Yeah, I actually tell our students this. You'll always have some specialization because any area evolves over time. But I hope I don't have to offer this course five, 10 years from now, that it's redundant, because all these things we're talking about is just mainstream investing, and they're totally incorporated in all courses that deal with investing or corporate strategy and things like that. 

Think about it, are we in a stage where, how can you ignore climate risk? How can you not focus on social inequalities and income inequalities, and what they could do to devastate this world? How can you not focus on good governance? Maybe you need some specialization just because areas evolve. But our goal is to really incorporate this in as many courses as possible so that our course is not necessary anymore.

What excites you the most about impact investing right now? And is there anything that you are disappointed about? Or where do you see the most improvement needed?

I try to break it up between the private and the public side. 

A lot of these funds, the big ones or little ones, have only been in place for, I don't know, five, six, seven years, not more than that. There's not enough of a track record to prove one way or the other that risk-adjusted, market-rate financial returns can be achieved, and you can move the needle on having an impact. There's not enough of a long track record. 

My hope is that in a few years, we'll have some of these funds that would have completed their lifespan. We'll have a lot more data. I'm not saying what the data is going to show. I think, based on what I've seen, the data will show that you don't sacrifice financial returns. But we have to prove that from an academic perspective. I think that's one of the things holding people back, they don't feel that this can be done.

The other issue is, what is impact measurement and metrics? Which I think need to be a little more standardized, a little improved, so that they can be used across portfolios. Right now, they're very bespoke, cumbersome at times. Again, a lot of work going on there, which is going to help make that happen.

I think the third is that the asset owners — the pension plans, endowments, and large family offices probably make up the biggest chunk of that — are caring a lot more about these things. Not only because they care about the world, but all those are very long-term investors. They have a time horizon, not of a quarter. They're talking about 25 years. And they have to factor in all these things and ask, “what kind of impact are my investments going to have around the world, which would either destroy the world as a result, and destroy the company as well?”

So therefore, I just think that that trend is irreversible. Incorporating ESG into your basic financial analysis will not be some side thing, but it will be a core part of your financial analysis.

I'm guessing you were alluding to Engine No. 1 earlier in the call when you were talking about that case study. Do you think shareholder activism is something that is going to proliferate? What do you think the future of funds and people trying to make an impact are going to look like?

I think it will, yeah. I think there'll be more engagement. 

Just to be clear, these are all the large funds, the asset owners, and therefore, as a result, the asset managers. Our universe is the owners, a lot of them. They own the market. If you don't like a company and you don't like what's happening in that company, you can't sell it, because it's a part of your index. Or it's part of an ETF that invested in a part of the broader market, and most of the large institutional investors can't have too much tracking error related to that.

So, you've got to have a much more aggressive engagement strategy, and publicly all the large asset managers are talking about their engagement strategy. You've got larger asset owners talking about engagement strategy. And it's putting pressure on boards to really rethink their strategy. It's really focusing the minds of management to talk about their strategy. And we've got a couple of cases that we've already written on, like what CalSTRS did around gun control. And how do they, as a large asset owner, influence outcomes.

There's another case on the positive side of creating an index that heavily overweights companies that have more diversity in not just their boards, but their senior management. And as a result, when companies get left out of these indices, there is a factor that there's a peer pressure to kind of get things done. 

I think you will see more activism. Companies are realizing that shareholders are caring about this a lot more. They need to respond and do something about it.

Michael Thrasher (@Mike_Thrasher) is the editor of RIA Intel and based in New York City.

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