Buffett formula measures whether impact investing is working

Howard Buffett cannot remember what prompted him to ask the question of his grandfather, but when the two men were walking down a New York street a few years back, he turned to him and asked: “If you want to be remembered for one thing in your life, what do you want to be remembered for?”

One of the world’s richest men, Warren Buffett is an unfathomably successful investor, revered and copied by other investors large and small. The creator of Berkshire Hathaway, America’s largest conglomerate by market value, is, after Bill Gates, the single most generous philanthropist on the planet. His answer to his grandson, though, was: “Being a teacher, educating other people.”

Howard, then in his first semester teaching at New York’s Columbia University, took the conversation to heart. His grandfather, now 88, still invites scores of business school students to his native Omaha, Nebraska, every year to answer queries on investing and more, and he revels in Berkshire’s famous annual shareholder meeting, when tens of thousands arrive to hear his words of wisdom on the company, on business and on the economy.

Meanwhile, Howard has doubled down on the academic life. Now 34, he is an associate professor at Columbia’s School of International and Public Affairs (SIPA) — though his preppy and boyish appearance means he is often mistaken for one of his students. He has been helping to build new courses to teach business management and sustainability to a generation of students who hold very different views on how money should be used than anyone of his grandfather’s generation.

Millennials, the younger Buffett points out, tell pollsters overwhelmingly that having a positive social impact is more important, when it comes to their own careers, than professional recognition or, when it comes to companies, than maximising profits. Just as the asset management industry has woken up to the need to cater to these emerging investors with a blizzard of new products labelled “impact investments”, academia is working to construct a research framework that can underpin new business and investment practices. And not a moment too soon, says Buffett, given the confusion over what constitutes an impact investment and how to measure the positive effect of a dollar of funding.

Many conversations on impact investing still devolve into arguments about definitions. Rare is the start-up entrepreneur who goes into business with the aim of having a negative impact. Rare is the multinational corporation that has not enthused its workforce with a sense of mission, whether it be dispensing life-saving pharmaceuticals or simply providing decent paying jobs in an anxiety-inducing economic era. Put on the rose-tinted spectacles of an asset manager’s marketing department and there might be little in modern capitalism that cannot be boxed up and sold as impact.

“A lot of conversations have been had and progress made, but a lot of it appears to have been done outside of the university setting,” says Buffett. “It is critical practitioners are playing a very active role in developing the space, but it also needs to be rooted in a highly analytical and research-based component as well.”

My definition of success is around how many classrooms we get into and how many students we reach. That’s the real impact

He pauses. “But I’m very biased. I’m teaching at Columbia. I’ve been researching doing a PhD in the subject matter. I have a whole chapter on impact measurement. But when it comes to the investment piece, most people in the field say we’ve been having similar conversations for decades now and it’s been circular. And I struggle with the fact that impact investing can mean something different to everybody still.”

The chapter to which Buffett refers is in a book he has written with the SIPA professor Bill Eimicke. The title of the book — and the university course they are building around it — is Social Value Investing, a twist on value investing, the investment philosophy that Buffett’s grandfather learnt at Columbia almost seven decades ago at the feet of the great stockpicker Benjamin Graham.

Using a range of examples, from the rejuvenation of New York’s Central Park to the provision of public services in Brazilian cities to the development of a biometric ID system rolled out across India, the book discusses the benefits of extensive collaboration between companies, governments, philanthropists and investors.

But it is Buffett’s framework for predicting and measuring the positive social and environmental impact of a project that will be of interest to impact investors. By providing a formula for what he calls iRR, or impact rate of return — another twist on a term from Wall Street, to which IRR means the internal rate of return used to measure private equity funds — he is hoping to bring some order to the proliferation of impact measurement tools.

The idea is not to supplant systems such as the Global Impact Investing Network’s Iris or the US Green Building Council’s LEED certification for construction projects, but to allow their metrics to be plugged into a formula along with other project goals, costs and time horizons. The intention is to generate a high-level score that allows investors to compare a more diverse range of potential uses for their time and money.

The opportunity is to have a narrow but very deep impact on people who are going to be running very meaningful organisations’

“Impact rate of return” is Buffett’s contribution to a cacophonous debate about impact measurement. The task now is to persuade people that it is a useful framework. “My individual definition of success is not around how many books we sell but how many classrooms we get into and how many students we reach,” he says. “That’s the real impact.”

There is no multi-billion-dollar inheritance in Howard Buffett’s future. Warren Buffett has set a course for his descendants that he urges other billionaire parents to adopt. “A very rich person,” he has often said, “should leave his kids enough to do anything, but not enough to do nothing.”

The Berkshire Hathaway fortune is gradually being passed to the Bill & Melinda Gates Foundation. Foundations that Warren Buffett created for each of his three children — including Howard’s father, also called Howard — must spend down their money by 2045.

Warren Buffett and Bill Gates have persuaded more than 180 of their fellow ultra-wealthy to sign their Giving Pledge to donate at least half of their fortune to charity. An offshoot of the project is a “next gen” group for the children and grandchildren of the pledgers, which Howard Buffett has an informal role co-ordinating, as they meet to share ideas for philanthropic projects and, increasingly, on how to shift their traditional investments towards impact investing. “It’s a wonderful group,” he says, “the second-, third- and fourth-generation folks who get together and explore challenges and topics on how can we be most effective. There’s learning sessions that go on. We talked about doing a learning session on the impact measurement piece, specifically.”

Buffett may yet end up as an impact investment “practitioner” himself, even as he deepens his links to Columbia University. Three years ago he co-founded i(x) Investments, which aims to build a holding company, Berkshire-style, housing a variety of businesses and investments that have a positive social or environmental impact. Raising money for it has proved harder than perhaps he and co-founder Trevor Neilson, formerly of the Gates Foundation, envisaged when they debuted the idea in a splashy feature in the New York Times.

Buffett demurs when asked to discuss its progress. According to its website, i(x) plans to build a business that turns municipal waste in Colombia into aviation fuel, to fund start-ups that “put more money in the wallets of women”, and to back a Los Angeles real estate developer that weighs social and environmental improvements alongside profit in its investments. Buffett’s role at i(x) is to build impact measurement systems for its nascent portfolio.

As i(x) and its ilk work to bring intentional and rigorously measured impact investing to a wider pool of potential investors, Buffett senses the tide is rising for ethically minded capitalism more generally. “These are all individual decisions,” he says. “It’s one person in a decision-making situation willing to choose something that has a different time horizon over a short-term gain, whether it’s the owner of a restaurant or [investment group BlackRock chief executive] Larry Fink or the student in the classroom who decides he or she is going focus on a different career.”

It is the reason he loves teaching, he says. “The opportunity is to have a narrow but very deep impact on a group of people and, at a place like SIPA, these are people who are going to be running very meaningful organisations in the future.”

But it is not just the leaders of the future. The investors of the future, too, are driving change, as the next generation’s attitudes sweep into the financial system. If you want to be an impact investor, he says, maybe you should change the way you think about how public companies should work and what measures you would support as a shareholder. “Imagine large groups of shareholders were demanding that their CEOs made a business decision that sacrifices quarterly earnings but served a three-year, five-year or 10-year time horizon. If shareholders are demanding it, then CEOs must do it, right?

“If the investors have a long-term viewpoint from the beginning, then impact investing wouldn’t be separate — it would just be investing.”