Magazine Article | October 1, 2019

Impact Investing — The Next BIG Thing In Life Sciences?

Source: Life Science Leader

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

Catherine Clark

Ever heard of impact investing? If not, don’t worry, you are not alone. I first heard this term earlier this year while attending a session at The Board Meeting West. I touched base with the speaker (a C-level biopharma exec) following the panel to get more info. Given a high-level overview, it seemed a great opportunity to put together a tutorial on what is likely to be the “next big thing” in life sciences. Why? Because impact investing is already being done by Big Pharmas such as J&J and Merck. So we connected with Catherine Clark, faculty director at the Center for the Advancement of Social Entrepreneurship (CASE) at Duke University’s Fuqua School of Business, who founded and directs the CASE i3 (Initiative on Impact Investing). The Duke professor has been involved in impact investing since 1992, “Though we didn’t call it that back then,” she admits. And though the practice of impact investing has been around for a while, it seems only now is it becoming mainstream.


Clark first became exposed to the concept of impact investing while working in New York at a private foundation — The Markle Foundation — run by a cofounder of Sesame Street, Lloyd Morrisett Jr., Ph.D. “Morrisett believed in the power of new media to educate and make society better,” she shares. Considering most of the media companies The Markle Foundation was working with had the technologies it was interested in leveraging, it made sense to Morrisett to invest in these for-profit businesses. “He said to me, ’We think of ourselves as social venture capitalists,’” Clark recalls. “I had no idea what he was talking about.” But her first taste for deploying capital to support an entrepreneur seeking to have a positive impact on society was lasting. She went back to get her MBA with the intent of starting her own impact investment fund, which she did, before going on to become one of the leading academic experts in the field.

According to Clark, impact investing is investing with both the intention and accountability toward two objectives. One is achieving some sort of targeted financial return. The second is having some sort of positive and measurable impact on social or environmental problems. “What differentiates an impact investor from a regular investor is both the intentionality and the accountability,” she elaborates. For example, a lot of investors have a positive impact on the world, as almost every investment creates jobs. But an impact investor wants to go above and beyond what normal companies are doing. “They want to pay attention to certain things they want their investment to do,” Clark clarifies. “That can happen at the level of someone putting money into an individual enterprise to be accountable for increasing the amount of solar power and decreasing the amount of oil and gas used.” It also can happen at the portfolio level, as we are presently seeing with investors seeking to maximize their ability to support women under the rubric of gender-lens investing. “You can take an intention and lay it over any level of investment,” she explains. “The accountable component is figuring out whether it’s working or how well it’s working and whether they should continue to invest.” And the field is developing standard ways to do this to make it easier to do in a scalable and sustainable way.

You might be wondering if choosing to be an impact investor means lowering expectations for financial returns. Such is not necessarily the case, says Clark. Every year the Global Impact Investing Network (GIIN) surveys 266 leading impact investing organizations collectively managing $239 billion. Nearly 80 percent of this year’s respondents noted targeting risk-adjusted market rate returns. “The rest target what they call concessionary returns, which means returns that are in some way less or take longer than normal market rate returns,” she elaborates.

In 2014, Clark and colleagues did a study of “high-performing impact investment funds,” identifying about 40. They then did in-depth case studies to determine what made these funds successful. “Our definition of ‘high-performing’ was funds that had met or exceeded investors’ expectations for financial return and impact, meaning they had to have articulated expectations and data to back up their ‘impact,’” she explains. The 13 highest-performing funds had returns ranging from .02 to 25 percent. Clark says a common question asked by students is, “What about that .02 percent? How is that meeting investor’s expectations?” The fund on the low end in this case is RSF Social Finance, which provides loans to social enterprises. “What they also do, which is unheard of, is have a quarterly meeting with all their investors where they bring the entrepreneurs/borrowers into face-to-face meetings with the investors and get advice from those communities about how to set the interest rate for the next quarter,” she explains. “The interest rate is floating depending on what the stakeholders want. Everyone realizes it’s a tradeoff and that return can go only three places: the borrower can keep it, the investor can get it back, or RSF can use it for operations.” At the time of the study (i.e., The Great Recession), the investors chose to lower their interest rate to help the borrowers, but the outcome still exceeded their expectations. “Everyone was happy, including the borrower, as they got a little more money to use with slightly lower payments. On the high-return end there were two funds (Bridges Fund Management in the U.K. and Elevar Equity, which operates out of India and Latin America) that identified untapped opportunities others viewed as risky, but they were able to consistently create high financial returns over time.


Impact investing is gaining popularity, as evidenced by the GIIN survey, which noted (as self-reported by investors) that assets under management being invested for impact are close to doubling every year for the past five years. There is soft data also supporting its growth (e.g., more white papers and conference topics with impact investing as a subject). Why? Clark says there are a number of reasons, beginning with demographics. “One is the baby boomer generation, which is trying to figure out what to do with the wealth they’ve earned,” she states. “As they retire, they are trying to figure out if they should be doing philanthropy, or perhaps something else more integrated with the skills built over a career, or an understanding of how change really happens.” The millennial generation is also off the charts. According to an annual survey conducted by Deloitte of working millennials up to age 26 globally, for at least the past five years, millennials have noted the number-one purpose of business is to improve society. “Making money and creating jobs are in the top five for this group, but not number one,” Clark clarifies. Millennials appear to have a different consciousness, wanting to live their values, of which investment is a part, as they understand it as a leverage point (even within their retirement accounts) to have influence on the world.

Clark explains that philanthropic dollars are regulatorily tracked in the U.S., while LLC dollars are private. This makes accounting for impact investing much harder to track, and perhaps one of its allures, as investors can invest in things that make sense to them with less fanfare around anything that could be perceived as controversial in certain circles (e.g., alternative fuels toward less dependence on fossil fuels).

Though impact investing is becoming more popular, there are many mistakes that can be made on many different levels by newcomers and those who have been doing it awhile. “The secret to creating a very successful impact investment fund is aligning your investment and impact theses, making them tight and credible, and then showing that you can actually execute on these,” Clark explains. A lot of people seem to think all they need to do is talk about the impact at the end, but that’s not true. “You have to start at the beginning,” the professor states. “You have to figure out what things you are looking for and the behaviors you are trying to change as part of your investing. What is the relationship that you are going to have with your investees around those things? How tangible is it? And what information are you going to get back along the way, because you’ve made a commitment to do that.” In other words, the number-one mistake observed by Clark is investors thinking of impact as an afterthought.

Impact investing is not to be confused with environmental, social, and governance (ESG) investing. “There are investors that use ESG factors [central factors in measuring the sustainability and ethical impact of an investment] as a screen for picking public companies to invest in,” she elaborates. “On the private side, people can go much deeper into actually trying to create measurable change [i.e., impact].” According to Clark, the public ESG and private-impact investing world are colliding and combining, so that many are finding ways to be both more responsible and impactful within the same portfolios.

Editor’s Note:

This is part one of a three-part series. Next month we will explore the experiences of a retired life science CEO building an impact-investment platform. In part three (January 2020), we will learn how two Big Pharmas are investing for impact.