Why so long for impact investing to become mainstream?
Investing for impact in businesses or projects that will make a positive difference to society, addressing problems and improving lives, has arrived. It’s part of the financial landscape.
This is amply illustrated by the fact that the United Nations has set up its own Social Impact Fund (UNDP-UNSIF) to bring together venture philanthropists, family trusts, foundations, corporations, governments and private sector investors to create a sustainable development goal (SDG) ‘blended financing’ platform – balancing both social and economic returns.
In the words of the fund’s founder and chief David Galipeau in an address to the Impact Investing World Forum 2017:
“Impact investing is about to go mainstream.”
Leading investment bank JP Morgan forecasts that the impact investment market will be worth some US$1trn in about two and a half years.
The interesting question isn’t why impact investing has established itself so firmly on the world’s financial stage, but why it has taken so long.
After all, in a speech he gave more than five years ago, then Prime Minister David Cameron extolled the virtues of social investment and said he wanted to make it a success in the UK and then sell it all over the world.
But the roots of socially responsible investing go back far longer than that.
In an article outlining a short history of impact investing, James Lumberg, co-founder and executive vice president of Envestnet, a provider of intelligent systems for wealth management, points out that ethical investing was supported in the Old Testament and the Qu’ran.
However, a clear theme that emerges from this history is that ethical investing was largely about avoiding putting money into certain activities that were seen as sinful or harmful. Methodists and Quakers, for example, urged their followers not to invest in alcohol or tobacco products, or in activities which encouraged gambling or slavery.
Even in the modern age and, while the religious motivation may have grown far less important, the ethical drive was still to shun certain businesses and activities. So, in the 1960s Vietnam War protestors demanded that university endowment funds divest themselves of defence sector investments. In the following decades there were powerful and long-running campaigns to boycott investments in companies that were regarded as supporting the apartheid regime in South Africa. In 1985, students at New York’s Columbia University organised a sit in to demand an end to the university’s investment in companies doing business with South Africa. It proved highly effective, as by 1993, US$625bn in investments had been redirected from South Africa.
A radical shift came, however, in the years leading up to David Cameron’s speech, as it was realised that ethical investments could not only be those which were steered away from areas where they did actual harm. Rather, they could be investments which were targeted to achieve a positive social good. In other words they could be impact investments.
This broadening of the definition has far reaching implications and has been a major driver of impact investing going mainstream as it has opened up many more possibilities for impact investments to deliver good financial returns.
In a recent article, Mark Haefele, chief investment officer of UBS global wealth management, argues that the old critics of sustainable and impact investing (SII) were unfairly and unfavourably comparing regular or traditional investing with “exclusion” investing or the exclusion of ethically questionable investments. For example, the Norwegian state pension fund calculates it has sacrificed 1.9 percentage points of return over the past decade by excluding arms manufacturers, coal producers and other businesses with ethical issues.
However, SII is no longer just about avoiding certain socially harmful activities. With impact investing it can also be a question of backing good things. Impact investments are made in businesses or projects that have a positive social impact, which could, for example, be providing clean water, renewable energy, life savings drugs or education. They might also be in traditional areas such as housebuilding, which revitalises communities and provides jobs, training and much needed new homes.
As Haefele points out, when impact investments are added to the definition of SII, the returns available to the investor look far more attractive. According to a meta-study by Friede & Busch, more than 90% of them have found that environmental, social and governance, ESG, factors have a positive or neutral impact on financial returns. It says:
“The results show that the business case for ESG investing is empirically very well founded.”
Given this, it’s hardly surprising that people seeking a home for their money are turning to impact investments. According to a UBS Investor Watch survey of wealthy investors globally, 39% say they already have some sustainable investments in their portfolios. This is likely to increase. In a white paper titled ‘Mobilizing Private Wealth for Public Good’, UBS points out that globally, over the next 20 years, some 460 billionaires will be leaving US$2.1trn to their heirs and impact investing is especially popular with millennials.
Added to this is the realisation that impact investing can succeed where governments so often fail. Research by Triodos bank has revealed that most investors believe businesses and not governments have the ability to address many of the biggest challenges facing the world. Nearly three-quarters said companies can create positive social and environmental change and half believe the state seems powerless to change society for the better.
This was echoed by David Cameron in his speech when he said:
“We’ve got a great idea here that can transform our societies, by using the power of finance to tackle the most difficult social problems. Problems that have frustrated government after government, country after country, generation after generation.”
He announced the creation of a social impact bond and a wholesale social investment bank, Big Society Capital.
A few months after this speech, the first G8 conference to tackle the subject announced measures to grow the global market for social investment. This was enthusiastically received and an open letter from business congratulated the G8 on their efforts to grow the global impact investment market, and voiced support. The letter was signed by more than 80 leading businesses and investment organisations, including JP Morgan, Deutsche Bank, Morgan Stanley, Credit Suisse, Goldman Sachs, KPMG, and the Ford and Rockefeller Foundations.
There’s no doubt that impact investing is going mainstream and the single main driver of this seems to have been that – as in the words of the song - people are beginning to “Accentuate the Positive’’.