2018 Impact Investing Overview
With growing demand for investments to have measurable social and environmental impact comes more attention to — and information about — the burgeoning field of impact investing.
It’s no surprise that the hardest part about summarizing the key impact investing themes and activities for 2018 is deciding what NOT to include.
There are many more thought leaders, intermediary players, opinion makers, data collectors, media curators and information disseminators out there than when we began covering the ecosystem in detail about five years ago.
The Year of Impact Mainstreaming
Larry Fink kicked off 2018 with his much-referenced letter to corporate CEOs, arguably setting the tone for a year that emphasizes the importance of impact. As described in the Chicago Booth Review:
“Laurence “Larry” Fink, the founder and CEO of BlackRock, the world’s largest asset manager, which has more than $6 trillion in assets under management, issued an open letter to CEOs this past January — and reportedly sent many of them into a tizzy. Fink’s letter said society is demanding that companies, public and private, need to “serve a social purpose,” benefiting not just shareholders but also employees, customers, and neighbors. And, he explained, from that point forward, BlackRock would be “eager to participate in discussions about long-term value creation and work to build a better framework for serving all your stakeholders.” Executives, he wrote, should be able to answer their questions about the company’s actions. For example, what role does the company play in the community? How is it managing its impact on the environment? Is it working to create a diverse workforce? “The time has come for a new model of shareholder engagement,” he wrote.”
For more information, check out our coverage:
CrunchBase covered the rising interest of venture capital in impact investing:
“As evidence of the growing popularity of impact investing, a number of large financial institutions — Bain Capital, UBS and TPG Growth — have hopped on the impact bandwagon. Last year, Bain Capital launched a $390 million double impact fund. Also in 2017, private equity firm TPG closed on its $2 billion “The Rise Fund.” Michael Baldinger, who joined UBS Asset Management as head of sustainable and impact investing in 2016, told CNN Money that impact investing is “a $250 billion market” that is “growing fast. It might really be a game-changer for the finance industry,” he said.”
Continued Asset Growth
Building on the theme of impact mainstreaming came several reports further demonstrating impact investing’s growth, along with the growth of all forms of values-based and sustainably responsibly investing.
The GIIN’s annual impact investing survey recorded unprecedented growth:
“The report findings are based on survey responses from 229 of the world’s leading impact investing organizations, including: fund managers, banks, foundations, development finance institutions, pension funds, insurance companies, and family offices. In total, respondents collectively manage over USD 228 billion in impact investing assets, a figure which serves as the latest best-available ‘floor’ for the size of the impact investing market. For the members we’ve tracked over five years, their compound annual growth rate is 13 percent.”
Additionally, The Forum for Sustainable and Responsible Investment (US SIF) released its biennial Report in 2018, finding:
“Sustainable, responsible and impact investing (SRI) assets now account for $12.0 trillion — or one in four dollars — of the $46.6 trillion in total assets under professional management in the United States. This represents a 38 percent increase over 2016.”
The Economist reminds us that the size of impact investing market depends on how broadly you define it:
“The size of the global impact investing market itself is contentious. Some place this figure at $228bn, others provide a considerably higher figure at $1.3tn, and yet others “value the current impact investing market at nearly $9tn in the US alone”.
Fran Seegull, the inaugural Executive Director of the U.S. Impact Investing Alliance, summarized this growth in Harvard Business School’s Impact Insight’s blog:
“This ecosystem is growing rapidly. U.S. capital invested with impact totaled $8.7 trillion in 2016, or about one in every five dollars. Around the world, close to $23 trillion is invested with an impact lens, mostly in the public markets with environment, social and governance (ESG) screens. And in 2017, investors reported $114 billion worth of private market impact investments, pursuing “deep impact” through direct investments in enterprises and funds.
The early leaders in this movement include high-net-worth families, foundations, pension funds and insurance companies. Soon, we expect retail investors to join in, as $30 trillion in wealth over the next 30 years will transfer to women and millennials (two groups deeply motivated to invest in accordance with values).
Mainstream financial players have taken notice, including wealth platforms like BAML, Goldman Sachs and Morgan Stanley and asset managers like Bain Capital, JANA Partners and TPG.”
Financial Return Expectations
Following quickly on the tails of evidence of growth is the conversation about financial return expectations. No longer are below market rate returns expected, but neither do investors want to exclude asset classes that allow for the terms that best benefit investees’ social impact objectives.
RBC Global Asset Management’s Responsible Investing Survey documents this attitude shift, as reported by Triple Pundit:
“According to the just-released third annual Responsible Investing Survey by RBC Global Asset Management, the percentage of U.S. institutional investors who reject ESG outright shrank to 34 percent from 51 percent in 2017. Further, 24 percent of U.S. investors now say that an ESG integrated portfolio will outperform a non-ESG portfolio, five times the number who agreed in 2017.
This echoes a global trend. For the first time, and by nearly every measure, institutional investors and consultants have shifted decisively from asking whether to adopt ESG principles, to looking at how to implement them.
Globally, 90 percent of institutional investors believe ESG integrated portfolios are likely to perform as well or better than non-ESG integrated portfolios, and 72 percent are using ESG to make investment decisions. More than half say they consider ESG integration to be part of their fiduciary duty — double the percentage who said so last year.”
Still Elizabeth Littlefield, a US development and finance veteran, warns that “not all social investment has to make a market return” in this Financial Times interview.
Social and Environmental Impact Measurement
Measurement of social and environmental impact remains a sticking point for many would-be impact investors. 2018 saw many conversations supporting standardization. Ethical Corporation spear-headed one such conversation at its Responsible Business Summit NY:
“It’s rare that the top reporting frameworks share a platform. But the Matthew Welch of the Sustainability Accounting Standards Board, Richard Howitt of the International Integrated Reporting Council, Simon Messenger of the Carbon Disclosure Standards Board and Tim Mohin of the Global Reporting Initiative took to the stage in an effort to dispel confusion about the alphabet soup of standards now crowding the reporting landscape
Welch, president of the SASB Foundation, the San Francisco-based newcomer on the reporting scene, said SASB is complementary to other standards. It focuses on investors and is industry-specific, looking at what is likely to be material at a company level rather than a societal or stakeholder level.
He said SASB doesn’t go far enough for socially minded investors, who might want to consult GRI or CDSB. “But it’s an important solution because we can help cross the bridge to investors who won’t look at the entire universe of ESG issues, but will look at a small number of material factors that … can be tied to company performance from a financial perspective.”
Mohin, CEO of 20-year-old GRI, agreed that the two standards were complementary, and said the idea that there is competition is a myth. “I think it’s more a matter of confusion [over what the standards do] rather than that there is a problem in the marketplace.”
Howitt of IIRC pointed to the Corporate Reporting Dialogue, which was set up two years by the IIRC to help companies navigate materiality definitions across eight different reporting regulations, standards and frameworks. “We aren’t just talking about harmonisation and collaboration; we are actually doing it …. And this year we are on the verge of putting together a joint project to align different frameworks, starting with the TCFD [Taskforce on Climate-related Financial Disclosure], which we will be announcing in the next couple of weeks. It will be the biggest signal back to the market that this alignment is taking place.”
While no measurement has emerged as the primary standard, progress is being made towards a better system for showing results akin to what’s available in financial measurement.
For example the Impact Management Project “is facilitating a network of leading standard-setting organisations to coordinate specific impact measurement and management efforts, so that enterprises and investors have complete rules of the road.” Impact Alpha describes the IMP as an emerging impact measurement architecture:
“The Impact Management Project has driven consensus about what it means to deliver impact through investing. A new network of standard-setting organizations could help standardize such impact management. The new IMP Network aims to move impact investors and businesses beyond risk management and good intentions to measurable improvement. The Sustainable Development Goals challenge enterprises and investors to account for both positive and negative impacts, the network says, “and to improve those impacts over time.”
… The network will be housed at Bridges Fund Management and led by Clara Barby. Members include UNDP, OECD and IFC, as well as Social Value International, Global Reporting Initiative, Principles for Responsible Investment, Global Impact Investing Network, World Benchmarking Alliance and the Global Steering Group for Impact Investment.
Impact, generally accepted. “In financial management, ‘general acceptance’ of norms for how we talk about, measure and manage financial performance enables capital to flow efficiently across value chains and across borders,” said Barby in statement. “If we want impact management to become the norm for every enterprise and investor, as the UN Sustainable Development Goals demand, we need shared principles, reporting standards and benchmarking methods for impact.”
Additionally, The International Finance Corporation (IFC) has developed:
“Operating Principles for Impact Management (the Principles) [which] describe the essential features of managing investment funds with the intent to contribute to measurable positive social, economic, or environmental impact, alongside financial returns. This goes beyond asset selection that aligns investment portfolios with impact goals (for example, the SDGs), to requiring a robust investment thesis of how the investment contributes to the achievement of impact [under draft consultation through December 2018].”
The Future
This year, the GIIN created a Roadmap of how we get to the impact economy. As Impact Alpha describes it:
“The GIIN envisions a fast-approaching future when social and environmental factors are integrated into investment decisions simply by default, as the ‘normal’ way of doing things.
Introducing the “Roadmap for the Future of Impact Investing,” the GIIN’s Amit Bouri said impact investing has indeed sparked a movement and moved hundreds of billions of dollars into solutions to social and environmental challenges. But the industry, he says, “is still generating only a fraction of the impact required to address the global challenges facing our communities and our planet.”
Progress to date, he says, is “dwarfed by persistent, troubling issues such as climate change, inequality, and social division.” Legacy financial systems, he suggests, won’t be able to meet targets like the Paris Climate Agreement or the Sustainable Development Goals.
The five- to seven-year action plan laid out by the GIIN is surprisingly practical. Much of it revolves around finally putting in place long-talked about industry infrastructure to equip investors to more efficiently make investment decisions informed about their social, environmental and economic impact.”
McKinsey & Company’s December article “Catalyzing the growth of the impact economy” further describes what a mature impact economy would like and what it would take to get there:
“In this article, which incorporates findings from our in-depth interviews with more than 100 investors, fund managers, social entrepreneurs, and other impact-economy stakeholders, we consider what it will take for the impact economy to reach maturity. We begin by exploring the vision for the impact economy outlined above. We then look at the roles that various impact-economy constituencies — investors, asset managers, entrepreneurs, governments, and philanthropists foremost among them — would play in a mature impact economy. Finally, we present three potential developments that would enable the impact economy to mature fully:
- instituting public policies that provide incentives and disincentives and create certainty
- achieving a broad commitment to mutually reinforcing operational, measurement, and reporting norms for fund managers, social entrepreneurs, and impact-economy intermediaries
- creating an industry body that promotes policies and standards of excellence and moves all participants to adopt them
These changes would enable and encourage stakeholders to reset some of capitalism’s assumptions and rules so that two goals receive equal priority: powering economic growth and wealth creation while also solving global social and environmental challenges.
Urgency, the SDGs and the Role of Startups
Nothing exemplifies the importance and urgency of impact investing as the landmark report by the UN Intergovernmental Panel on Climate Change (IPCC), which warns that “we have 12 years to limit climate change.”
Three years into the Sustainable Development Goals, at current levels of investment in SDG-relevant sectors, developing countries alone face an annual gap of $2.5 trillion, according to UNCTAD.
“The UN estimates that USD 5–7 trillion is needed annually to achieve the goals. As such, it is critical that investors go beyond alignment to the global goals and instead, raise and direct new capital towards progress against the SDGs. The GIIN’s latest report, Financing the Sustainable Development Goals: Impact Investing in Action, reiterates the need for impact investors to raise and direct new capital to help meet the SDGs by 2030 and showcases how select impact investors are taking action.”
Despite these challenges and funding gaps, the SDGs also represent tremendous opportunity, especially for startups. As Triple Pundit reports in it article “Small Businesses Can (and Should) Do More to Align with the SDGs”:
“Achieving the SDGs will unlock at least $12 trillion in new market opportunities and create 380 million new jobs by 2030, according to a 2017 report from the Business and Sustainable Development Commission. Both small and large businesses will reap the benefits, but we’ll never realize them unless we have all hands on deck.”
Startups, with their innovative ideas and nimble operations, are well-positioned to help attract the level of investment needed to move the needle on the SDGs. According to the World Economic Forum:
“Something doesn’t quite add up in the world of venture capital (VC). Most start-ups are founded by millennials, 76% of whom believe that businesses have the power to make a difference in the world. So, why aren’t most start-ups socially responsible?
On the other hand, out of the $85 trillion of assets under management globally (roughly $1 trillion of which is in VC funds), $23 trillion incorporate non-financial information such as environmental, social and corporate governance (ESG) data in their investment criteria, and that figure is growing by 25% a year. So why do VCs remain somehow aloof from this trend?”
In Conclusion
If impact investing is a subset of ESG investing, then SDG investing is a subset of impact investing — for now. Pursuit of the SDGs continues to be a growing framework for not only how nonprofits and philanthropies are making an impact, but also how private sector investments are impacting our world — as the lines between philanthropy and investment become increasingly blurred and blended.
PS — for a good historical overview of impact investing up until 2018, check out this NewDay blog post.
