Impact Investing: The Next Big Movement
Few people find that thoughts about pension plans make their heart beat faster. Matters such as future income levels, tax benefits, and inheritance liabilities can be uninspiring. But what if our conversations about pension savings were not just about the money we’ll need to live on in retirement but about the kind of world we want to retire in?
Such conversations are becoming more frequent. The reason? Impact Investing: investments that deliver both financial returns and positive social and environmental impact. Whether investing in American affordable housing companies or companies providing solar power to rural communities in India, impact investing provides a way to ensure our dollars are put to good use to shape our world for the better.
Research we conducted last year demonstrates growing acceptance of this practice. We found that in 2016 alone, impact investors worldwide committed a total of $22.1 billion in assets into almost 8,000 impact investments, collectively managing nearly $114 billion in assets — and this is just the amount held by survey participants. The actual figure is far larger and is growing every year.
But beyond the industry numbers, there is another way of seeing impact investing — as a movement, one whose goal is to harness investment capital to change the world.
Given the global challenges we now face, the transition to this kind of investing cannot happen quickly enough. First, we are witnessing tangible evidence of the effects of conventional industrial activity on the planet. In recent years, climate change has contributed to a string of devastating natural disasters. Pollution blankets many global cities, robbing communities of clean air and resulting in millions of deaths every year.
Large swathes of the population feel marginalized, forgotten, and undervalued as they face unemployment and a lack of alternative opportunities. And society is repeatedly confronted with the uncomfortable details of the systemic barriers women around the world continue to face.
Unfortunately, our current financial system often makes things worse, exacerbating inequality and incentivizing business decisions that cause harm to the planet. Something needs to change.
I believe the impact investing movement has the potential to turbocharge an increasingly important part of the solution, providing a powerful catalyst for shifting the way our financial markets work. Part of what gives me this confidence is my observation of other well-known movements — from the battle for women’s rights to the environmental movement to the campaign ending South Africa’s apartheid legislation — that have been effective in shifting societal values and norms.
Successful movements seem to have several success factors in common:
· Clarity of purpose and a vision that creates direction and unites people around a common cause. We certainly saw this in the early women’s movement in the United States, where a group of focused and determined women came together at the Seneca Falls Convention in 1848, and made a bold call for equal rights and political representation for all sexes.
· A cohort of champions who can advance their vision and galvanize broader support for it. In the environmental movement, this began in the late 1800s, when small, dedicated groups of environmentalists focused concerted lobbying and education around saving specific endangered species, establishing national parks, limiting deforestation, and reducing pollution.
· Short-term victories that advance long-term goals. In the anti-apartheid movement of the late twentieth century, a group of South African exiles worked with the UN General Assembly to establish a special committee against apartheid practices of racial discrimination. This gave the movement credibility and momentum and, when the committee called upon the international community to impose economic sanctions against South Africa, governments responded with legislation banning new investment into the country. This led to hundreds of companies divesting from South Africa, and in the early 90s, the anti-apartheid movement achieved its goal of repealing legislation supporting racial discrimination.
· Allies outside the core base, from policymakers to businesses and groups working in related areas. For the environmentalists and anti-apartheid campaigners, engaging businesses and governments proved critical.
Assessing the impact investing movement against these four key success factors, I am confident it will achieve its ultimate goal of building a greener, more equitable world.
Certainly, most impact investors are inspired by the vision of using their dollars to create positive impact for people or the planet. I envision a future where it will be unacceptable to make investment decisions without regard for the impact on people and the planet, where investors feel a responsibility to help tackle the most difficult and important threats to global society.
A cohort of impact investing champions has already emerged, with knowledge, expertise, and an increasingly credible track record. The GIIN, for example, leads a global membership network of leading investors, including over 260 organizations in 36 countries. Other groups are also playing key roles, including conducting research on performance, developing tools to improve investment processes, promoting knowledge sharing, and developing education and training.
Short-term victories include compelling proof of competitive financial returns, and the commitment of institutional investors and large-scale asset managers to both the impact investing industry and the movement.
Allies outside the core base have been attracted to impact investing, in part through growing awareness of the United Nations Sustainable Development Goals (SDGs), which provide a powerful global framework for tackling social and environmental problems. These include the international development community, which has explicitly called on capital markets to play a role in meeting the SDGs, an increasing number of governments around the world that are exploring policies and regulations to unleash impact investing, and key players in the philanthropic community, who are increasingly adopting impact investing as a new tool in their toolbox for driving change.
Of course, for this movement to accelerate, much more work is needed. We must strengthen the identity of impact investing, build additional tools that integrate impact into investment decisions, bolster impact investing education, and create a broader range of impact investment products, including more retail products to enable everyone to build wealth while creating positive impact. In these ways, the doors will open even wider for others who want to join this movement.
I believe that in the next decade, as a growing number of people want their money to do more than just generate more money, the impact investing movement will take off. Impact investing will become part of “a new normal,” galvanizing capital markets to play a significant role in tackling or even solving big global challenges such as poverty, inequality, and environmental degradation. It will shift the relationship between people and financial markets and will lead all investors to understand the full impact of their work. When this can be done easily, by anyone, our global citizenry will be empowered to create a better world — for us all.