Forbes, 5 July 2018: https://goo.gl/mDRKjS
Solving the world’s biggest social and environmental challenges is going to cost money. Lots of money (as I wrote in my last blog, just achieving SDG 1 is likely to cost $1.4trn a year). So it’s vital that we find new ways of drawing in private capital to supplement the efforts of governments and philanthropy. Over $100trn is currently invested in private wealth accounts globally, mostly without consideration of social and environmental impact. Imagine if we could deploy a sizeable chunk of this capital to support investments that make our world a better place?
The good news is that there are a growing number of private investors who want to do this, either because they want to better align their investments with their values, or because they think it makes financial sense – as a way to find growth in mature markets, or to diversify their portfolio.
Values-driven investing is not, in itself, a new phenomenon. It’s been around for centuries in different forms, notably with the Quakers and other religious groups. More recently, the 1980s saw the birth of the Socially Responsible Investment movement (SRI), which led to ethically-minded investors screening out so-called ‘sin stocks’ or goods from countries with questionable political regimes (e.g. during South Africa’s apartheid period). And since the turn of the century, support has been growing for responsible or ESG investing. The institutions that have signed up to the UN Principles of Responsible Investment have a combined AUM of over $70trn; while according to a recent survey by Morgan Stanley, 70% of asset owners globally have already implemented ESG strategies.
In other words, it has become increasingly clear that investors do not have a binary choice between investment and philanthropy. In fact, as a 2014 paper produced by the G8 Social Impact Investment Taskforce showed, there’s now a ‘Spectrum of Capital’, with financially-driven investment at one end, pure philanthropy at the other, and a number of approaches sitting somewhere between the two – including investors who negatively screen for ESG factors, those who seek out ESG opportunities, and those who actively set out to address societal challenges.
This last category is, broadly speaking, what we mean by impact investment. And it’s growing fast. According to a recent Global Impact Investing Network survey, investors committed more than $35 billion to impact investment deals in 2017, a 58% increase on the previous year; while total impact assets of its respondents were $228 billion, double the 2016 total.
Part of this growth is driven by the changing profile of wealth holders, a function of broader demographic trends. Globally, we’re starting to see a huge transfer of wealth to women and millennials. According to the Boston Consulting Group, women are likely to hold $72trn of private wealth by 2020; that’s about a third of the global total, and more than twice as much as they held in 2010. Similarly, UBS reckons that $7trn globally will pass into the hands of millennials between 2017 and 2020.
This is significant because research suggests both women and millennials are more likely to invest in line with their values. For instance, U.S. Trust recently asked a group of high-net-worth investors how important social, political or environmental concerns were to their investment decisions: 63% of women said these factors were ‘somewhat’ or ‘extremely’ important, compared to 41% of men. And a survey by BlackRock last year found that 67% of millennials want investments to reflect their social and environmental values (the figure for women was even higher: 76%).
These are very positive tailwinds. But we can’t just rely on them. Historically, the two biggest barriers to the growth of impact investment have been a lack of clarity around fiduciary duty, and a lack of available products for those who do want to invest. In the US and the UK, governments have taken steps to resolve the first issue, by making it clear that fiduciaries (i.e. those investing on behalf of others) are allowed to consider social and environmental factors as well as financial factors. And they’ve also been building the supporting infrastructure required for new products to flourish – a good example being the UK’s ‘social investment bank’ Big Society Capital, which is channelling money from dormant bank accounts to seed impact investment funds.
It's a good start, but there’s much more we can do – particularly in terms of helping retail investors to invest for impact. Many of the large wealth managers are now trying to build impact investment platforms for their clients. But to truly democratise impact investing, we need to make it more accessible to ordinary savers. One promising avenue for this is ‘Pensions with Purpose’, which will allow any of us to invest at least a portion of our pension pots in impactful investments. Expect to hear more on that later this year.
The need is pressing; the demand is growing. It’s up to us to connect the dots.