Brace for impact.
The once-niche domain of impact investing has now become mainstream. The Global Impact Investing Network estimates the category hit $715 billion in assets under management in 2020.
In advance of their presentations at the SALT New York 2021 Conference in September, I spoke with some industry leaders about their approach to impact investing.
According to Lisa Diaz, Partner, President, and CEO of Prince Street Capital Management, “a recent survey of institutional investors representing $7 trillion suggested that 64% expect ESG integration into stock selection will have an 88% positive correlation with outperformance.”
CURRENT TRENDS IN IMPACT INVESTING
The coronavirus pandemic demonstrated the need for global cooperation to solve severe problems while pulling demand forward for adopting impact investing strategies. Companies and institutions are finding it more difficult to ignore the call to demonstrate their impact by investors.
“There’s a paradigm shift around ESG engagement on the part of management and investors alike,” said Rupal Bhansali, Chief Investment Officer and Portfolio Manager, International & Global Equities at Ariel Investments. “It’s pivoted from being reactive to proactive and from a metric to a mosaic.”
“A trend I’d highlight is a strong focus to align with the UN Sustainable Development Goals (SDGs),” said Faheen Allibhoy, head of the J.P. Morgan Development Finance Institution. “There’s also more emphasis on how to best report on and monitor impact. I’d also point to increased activity among the buy-side in building out ESG teams as well as institutional investors launching impact-focused funds.”
Jolyne Caruso-FitzGerald, Divisional Vice Chairman, Global Wealth Management, UHNW at UBS, said, “the pandemic was a pause, an opportunity for [Ultra High Net Worth] families to think about their impact. How can their capital sustain generations while also affecting change in the world?”
HOW SOCIAL CAPITALISM HELPS THE WORLD
Social capitalism envisions private enterprise as an agent of societal change and combines capitalism with corporate responsibility for societal benefits. Social capitalists must do what they can to produce long-term benefits for society while still generating profits.
“Institutions are finding profitable ways to meet their fiduciary obligations and duties to their shareholders by taking a broader stakeholder perspective,” said Ketan Patel, co-founder and CEO of Greater Pacific Capital and founder of the Force for Good initiative. “By addressing some of the most difficult problems in the world, they’re developing deeper problem-solving skills, enhancing their values and cultures, and mobilizing wider sources of capital, resources and expertise. Doing good deeds pays dividends.”
“The broader community is recognizing that the folks most affected by disadvantages are likely to be the ones to come up with better solutions to resolve them,” said Les Brun, Chairman & CEO of Ariel Alternatives. “That’s not going to change in terms of the desire to invest in minority entrepreneurs, women entrepreneurs, and others, even if only for mercantile reasons to drive their own economic outcome.”
WHAT DOES THE FUTURE HOLD FOR IMPACT INVESTING?
As wealth transfers between generations, the momentum behind impact investing will likely grow while shifting into new directions.
“$30 trillion is set to change hands over the next few decades,” said Diaz. “As Millennials grow their wealth through earnings and inheritance, we expect impact investing will continue to grow as part of the investing landscape.”
“While we can expect the market to continue to focus on climate as the key global challenge to tackle,” said Allibhoy, “there will be an increasing focus on broader economic and social impacts – job creation, health and educational outcomes, access to finance, skills training, telecommunication and broadband access, for example.”
According to Caruso-FitzGerald, “families previously focused on their grants and philanthropic dollars going towards these impact themes are now thinking, ‘How do I align that with my active portfolio? How can I leverage my philanthropy into investments that make a difference and are correlated to the things I care about?’”
DEFINING IMPACT ON A GLOBAL SCALE
“‘Impact’ isn’t synonymous with ‘solution,’ but it signifies the means to positively influence the world,” said Michaela Edwards, Partner at Capricorn Investment Group. “We are up against gigantic and complex problems, and impact is the action that gets us closer to economic and environmental sustainability.”
“We have ring-fenced certain communities and exploited them or underinvested in them,” said Brun. “As people begin to peel the layers of the onion back, they’re starting to recognize that investing in those communities is advantageous to everybody. We can drive productivity and higher demand for goods and services, and we can drive a better society.”
“It’s important to distinguish greenwashing from real impact,” said Bhansali. “As active, fundamental investors, we are well suited to have a seat at the table, make our voices heard and engage with management teams to move the ball forward.”
“Financial institutions that are behind on this are likely to be left behind because they’ll be living in a 20th century model of capitalism, which is suited to another time and set of circumstances,” said Patel.
“Capitalism is being reinvented by people who understand the problems of the world and are willing to step up in addressing them.”