Impact Investment: A New Wave Approaching

March 15th 2020 - Edition #27

The world is changing for business. To consider a business strategy without a clear focus on the social and environmental challenges, evidenced by a world in change, is an outdated strategy.

However, we still live in a world where many investors are profiting at the expense of a struggling society. This paradox is a threat both to the legitimacy of capital markets and to the future of capitalism itself.

Fortunately, this is changing. After the three-in-a-row letters from Larry Fink, Black Rock’s CEO, we can clearly see the end in sight for the short term, profit-obsessed capital markets.

In fact, Impact investment is getting traction, as societal returns are being considered essential from the investor side. In fact, 66% of millennials consider social and environmental criteria in their decisions and the next generation of Millennials and Gen Z (trillions of dollars will change hands to these new generations) want to invest in impact. They are transforming the concept of investment: not only playing with the traditional risk and return principles of investment operations but adding another important criteria to their decisions: Impact.

Moreover, as markets evolve, impact investment promises to become mainstream, as legislations incorporate sustainability as a must, not a garnish.

What is Impact investment?

Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return (GIIN, 2020). Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on financial returns. It shows social issues can be profitable and this is a trend to grow. Moreover, the rigorous impact measurement of this investments allow us to distinguish between a real economic-value creation through social impact, from private sector window dressing.

The rigorous impact measurement of these investments allow us to distinguish between a real economic-value creation through social impact, from private sector window dressing. This is why impact measurement is crucial, but also one of the biggest challenges coming on this field. Actually, “what is priced now, doesn’t reflect what will be priced in the future”.

What about its relevance?

The current size of the global impact investing market is of $502 billion (2018 data). This value have been impressively doubling for the last years (228 billion in 2017 and 107 billion in 2016).  It includes asset managers, foundations, banks, development finance institutions, family offices, pension funds, insurance companies, among others. As this money starts changing to new hands, these figures promise even greater expansion.

One symptomatic example that investment with impact is coming to stay is the recent example of Danone and BNP Paribas. These two companies agreed on a credit facility that directly links the borrowing costs to “verified positive impact on the word”. In simple terms, an increase in impact by Danone operations, reflected in higher ESG scores, translates into cheaper capital for the company. Other companies are following this example.

Another example expressing the success of impact investment is the London-based Generation Investment Management, that was recently ranked by Mercer Analytics as the highest-performing fund out of 169 global investment funds over its 12-year history. Generation’s strategy is: “the impact on society is the driver of value creation”. The firm investment model brings sustainability to the centre of decision, alongside with financial returns. The fund searches for companies with distinctive competitive strategies based on their environmental impact. This is resulting in higher than average returns for this UK based fund.

Impact is already an investment criteria, and the coming efforts on the impact measurement standardisation will definitely leverage the loop for this market expansion and its establishment as the rule for the future.

Now, the challenge is for CEOs, CFOs and Boards of Directors to understand impact as a premia in market prices, and to perceive how their companies can answer to these new standards of “not-only-financial performance”, that require to put societal issues at the core. Moving in this direction will also rescue the virtue of the investor, as a professional with a higher purpose, leveraging greater profits by expanding opportunities for all, instead of extracting short-term profit for the few, at society’s long-term expense.

The future is being designed as we change market rules.  And, as social needs start being tackled with profitable business models, investors have a tremendous contribution to make, while the magic of capitalism is unleashed.

Have a great and impactful week!

Filipa Pires de Almeida
Center for Responsible Business and Leadership
Católica Lisbon School of Business and Economics

The Center for Responsible Business & Leadership has the main purpose of contributing for Sustainability and Responsible Leadership to become part of the “way we do things in our planet”. Find out more here.

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