Why impact investing and changing corporate behavior is important

Sustainability is at the core of our purpose and at UBS we have a long history in sustainable investing. That’s why we spoke with Nobel-winning economists about the power of sustainable investing.

15 Aug 2019
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Taking better care of our planet and mitigating climate change effects is being discussed by a seemingly infinite number of organizations and institutions. The environmental and social challenges that face us today are significant, and addressing them will require both action and capital. Investing can contribute by funding impact investing solutions that target measurable positive change on these issues.

What is impact investing?

In 2007, the Rockefeller Foundation gave a label to investments that are made with the intention to generate both a financial return and a social or environmental impact. “The old view was that it’s a tradeoff,” explains Nobel Laureate Michael Spence. That view has changed, and impact investing is based on the idea that you can in fact achieve both.

In short, impact investments seek to drive measurable positive change on environmental, social or governance issues.

Changing corporate behavior is essential

Spence explains how environmental challenges can’t be tackled if governments alone are held accountable. “It’s not something where you can do it all with policy,” he says. “You need shifts in values, shifts in behavior. The general trend seems to be away from the shareholder value maximization model, where all the objectives get thrown over to the government side. The corporate sector is too important.”

Many companies understand that integrating sustainability into their business models is beneficial for them, as environmental and social awareness rises. “If you can’t make the case that, on balance, you’re doing good, you’re going to be hurting,” says Spence. “Certainly, the more progressive business leaders have gotten the message.”

Spence’s fellow Laureate, contract theorist Bengt Holmström, agrees. “The public’s concerns about the environment is really rising fast now. Those who ignore it and just say, ‘We do business the way we used to,’ are going to do financially worse.”

“There may come a time where, if this trend continues and people change their investment behavior in large numbers, there is actually an impact on the cost of capital in the public markets,” says Spence. “If you invest according to your values, 15 years from now it may actually be part of the majority.”

Will increased awareness change investor behavior?

But is the transition towards awareness and change reflected in investment behavior already? “People understand that it does matter whether economies produce sustainable growth,” says Spence. “They are in the early stages of trying to understand what that means in terms of sensible targets for their investments.”

Robert Merton, a financial economist, adds, “The financial system in itself can have a very profound real effect, including environmentally favorable outcomes. It’s going to take time, but there’s no question that it’s on the agenda.” Investors have a critical role to play in driving change, including using the power of their capital to signal expectations about corporate behavior with regard to people and planet.

Evaluating the size of the impact investing market

According to the Global Impact Investing Network (GIIN), a total of 715 billion USD was managed by impact investors in 2020. This figure has grown significantly in recent years, yet is still small compared to overall global equity markets. For 2020, the equity market size was 89 trillion USD.

One thing that might hold investors back is the concern that targeting sustainability objectives could lower potential financial returns. While performance history is more limited, our view is that impact investments should performs as well or better than comparable traditional investments due to the scale of the opportunity set. The GIIN’s annual investor survey of 200 leading global impact investing institutions showed a majority indicating that their investments met expectations for both impact and financial performance, while 15 percent said their expectations were exceeded.

Do these strategies actually deliver impact?

How can investors be confident that impact investing solutions are in fact working to drive positive change? The Operating Principles for Impact Management, launched by the International Finance Corporation (IFC) together with global investors including UBS, provide a framework for ensuring that impact is fully integrated into the investment lifecycle. Each investor will apply these principles in different ways to drive impact, but the intent is to provide some common ground and encourage best practice among investors who explicitly target positive change. Doing so supports the potential to “bring impact investing into the mainstream,” as IFC CEO Philippe Le Houerou remarked.

Each investor will measure and manage impact differently depending on their approach and the outcomes they target, but the impact should be tracked and managed just as is done for financial performance. Better measurement tools are crucial going forward so that investors can have confidence in the impact achieved through their investments.

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