The case for impact investing is increasingly compelling, not just as an adjunct to traditional investing but as an evolution of how we influence the flow of capital in and across society. After decades of viewing investment purely through a financial lens, where the primary goal was to maximize returns to shareholders, we’re beginning to understand that a broader perspective is necessary. This perspective must recognize that capital does more than create wealth; it shapes societies, influences behaviors, determines futures, and has the power to address some of the most pressing issues our world faces today, such as healthcare disparities, access to education and social inequities.
At its core, impact investing offers a more holistic approach to funding by factoring in both financial returns and positive social and environmental outcomes. It’s a strategy that weaves the tapestry of our society, economy and planet into the investment decision-making process. It acknowledges that these threads are not separate but deeply intertwined, and it is high time we integrated this understanding through systemic changes to mainstream investing.
There are encouraging signs that such a shift is underway. The Global Impact Investing Network reports the impact investing market ballooned to $715 billion in assets under management (AUM) in 2020, demonstrating a surge of interest from investors around the globe. This, coupled with the data that shows 88% of impact investors reported returns that met or exceeded their expectations, makes for a compelling case. Yet, when we compare the impact investing market with the estimated $89 trillion global total assets under management, it becomes evident that there is an enormous latent potential for impact investing to expand its influence within the financial world.
Central to the philosophy of impact investing is the pursuit of what has been called “double bottom line” returns — the combination of financial profitability alongside tangible social and environmental benefits. This approach challenges and seeks to overturn the long-held belief that social good and profitability must be trade-offs. The evidence, in fact, suggests they can be mutual enablers.
Numerous research studies indicate that companies committed to environmental, social and governance (ESG) standards often outperform their counterparts that do not prioritize these values. A study by MSCI, a leading provider of decision support tools and services for the global investment community, revealed that companies with strong ESG practices can and often do yield higher returns than those with weak ESG performance.
The reasons behind this trend are multi-faceted. Firstly, companies with a strong emphasis on ESG principles often have robust risk management frameworks. Secondly, companies that uphold ESG principles typically engender happier, more engaged employees and customers. Thirdly, such businesses are increasingly appealing to a growing segment of conscious consumers and investors who deeply care about the impact their money is making on current and future generations.
Despite these promising developments, there are still considerable challenges to fully realizing the potential of impact investing. One of the main hurdles is the absence of a unified standard for measuring and reporting “impact.” While financial returns are relatively easy to quantify, assessing the social and environmental impact of investments is significantly more complex.
A few notable frameworks and tools have emerged to help address this challenge, seeking to standardize impact measurement and reporting. These include the United Nations Sustainable Development Goals, the Global Reporting Initiative and the Impact Management Project. While these instruments provide broad objectives from which investors can glean focus areas, they do not provide investors with a means to evaluate the impact of their investments or offer companies clear guidelines on improving their operations’ sustainability and social responsibility.
Another barrier that needs to be surmounted is the lack of understanding and knowledge about impact investing among mainstream investors. Many still adhere to the outdated notion that social or environmental good necessarily implies a compromise on financial returns. Education and awareness campaigns must be implemented at scale to dismantle this misconception.
Lastly, we must ensure that the intent behind impact investments is genuine and not just a veneer of social responsibility. The term “greenwashing” has been coined to describe practices where companies falsely proclaim their environmental credentials to attract conscious consumers and investors. To prevent such deceptive practices, thorough due diligence and ongoing monitoring of investments are crucial.
Overall, impact investing presents a formidable tool for tackling our era’s urgent social and environmental challenges while delivering financial returns. It signals a fundamental shift in the way we perceive the role of capital in society, from a purely profit-driven perspective to one that recognizes the intricate interconnectedness of our world.
In turn, to unlock the full potential of impact investing, we must standardize and enhance impact reporting, educate investors about its merits, and ensure that investments are genuinely aligned to create a positive impact. With these steps, we can position impact investing as a driving force toward a sustainable and equitable future, bring about a revolution in the finance industry, and help move toward a more harmonious society.
Dean Newton is a general partner at Nashville-based Relevance Ventures. A Patawomeck Tribe member, he previously held pivotal roles at Blackboard Inc., Emotive Communications, and Moviso. At Relevance, he seeks investments that will make the world a better place. Newton holds an A.B. and J.D. from Harvard.
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