Taking better care of our planet and mitigating climate change effects is being discussed by a seemingly infinite number of organizations and institutions. While, for example, reducing food waste, driving electric cars or using solar energy are at the top of everyone’s mind, an obvious solution hasn’t yet made headlines – 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 has changed with impact investing being 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.
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 have understood 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.”
But is the transition towards more awareness 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.”
According to the Global Impact Investing Network (GIIN), a total of 228 billion USD was managed by impact investors in 2017. Though this is an increase compared to recent years, it’s still a small market compared to the global equity market. For 2017, the AUM – meaning all assets under management – was 79 trillion USD.
One thing that might hold investors back is some worry that incorporating ESG factors will lower their financial return. The GIIN however states that impact investment performs as well or even outperforms other types of investment. In their annual investor survey, the GIIN conducted a survey with 200 of the world’s leading impact investing institutions. A majority said that their investments met expectations for both impact and financial performance, 15 percent even said their expectations were exceeded.
A big challenge though is providing data on the actual social or environmental impact of an investment. The idea behind impact investing is that an impact can as accurately and in the same rigorous manner be measured as financial performance. Better measurement tools will be crucial so that more people trust in the actual impact they can have with their investment. The OECD states that a lack of internationally comparable data and the risk of “impact washing” or “green washing” have to be considered.
In an effort to address this, the International Finance Corporation (IFC) at the World Bank – together with UBS and other globally operating, institutional investors – launched a number of operating principles for impact investing. They commit to manage their assets on the basis of a common standard, believing that there is potential to “bring impact investing into mainstream,” as CEO at IFC Philippe Le Houérou stated. One major goal is to better outline critical success factors and establish best practices.
“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.”