New political realities have been a wake up call for the growing movement seeking demonstrable, measurable impact on social and environmental challenges. Stripped of a sympathetic U.S. administration, investors and activists trying to mobilize private capital to curb climate change, eliminate global poverty and close the gap on income inequality are choosing whether to shy away – or double down.
“This shift in political landscape is a call to action… to focus the power of thoughtful and responsible capital markets facilitating solutions to the most critical imperatives of our time,” Erika Karp, founder and CEO of Cornerstone Capital, a sustainable investment advisor and asset managers, wrote in a note to clients.
Here are six opportunities — and a big risk — for investors driving the shift toward a more sustainable and inclusive economy.
The Global Goals are an organizing framework
The U.N. Sustainable Development Goals aren’t just an unifying framework for impact, they’re a compass pointing to new market opportunities worth $12 trillion in annual cost savings and revenues.
The finance gap to fill to achieve the goals (see “Call to Action: Align Global Assets with Global Goals“) is also an investment opportunity. “Impact investment is coalescing around the SDGs as being a way of almost articulating and branding what impact investment is all about,” Nick O’Donohoe, senior adviser at the Bill & Melinda Gates Foundation, told Devex.
Some of the world's largest asset managers are making a directional bet on SDG-aligned issues including health, energy and ending poverty. PGGM, along with APG, one of the world’s largest asset managers, is shifting assets to align with the goals. UBS has carved out $5 billion for SDG-aligned investments. Smaller firms such as Sonen Capital, which manages about $400 million in client assets, are using the global goals as a framework to measure and communicate impact.
Turn the spotlight to impact
Blackrock, Bain, TPG: the news has been on the big investors and big funds entering the market. In 2017, the conversation should emphasize impact. “Is social entrepreneurship really making a dent in the big problems facing the world today? 2017 would be a good time to talk about this,” Harvey Koh, managing director of FSG, told the Miller Center. Can impact investing help blunt, and turnaround, the dislocations and inequalities caused by globalization and technological advances? If impact investing is indeed mainstreaming we’d better make sure it’s delivering…impact.
Bridge International Academies, a consummate impact investing proof point, came under fire in 2016 for the performance of its low-cost private schools in East Africa (NextBillion has a recap of the punch and counterpunch). The impact of digital financial inclusion and mobile payments is under more scutiny. Will it fall into the same trap as microfinance? Or does recent evidence suggest digital money is indeed, pro-poor?
“In any given year, financial returns can go up or go down. Up, we feel great; down, awful,” said Adam Bendell, CEO of Toniic. “Measured impact also has volatility, whether you look for social impact or carbon reduction.”
Broaden the focus from impact to justice
With refugee crises in the Middle East and Europe, inequality persisting and worsening within many countries, and rights movements growing for women, black and Native communities in the U.S., impact investors could play a larger role in addressing the root causes of social and economic injustice. “Is 2017 the year [social entrepreneurship] & [impact investing] evolves from [impact] & focuses on justice?” Martin Montero tweeted in January.
Under President Darren Walker, the Ford Foundation, an impact investing pioneer, is doubling down on social justice. For every investment we make, says Aner Ben-Ami of Pi Investments, we should ask ourselves “Is this a strategy that helps re-define who wins or loses in our economy?” Otherwise, he says, “Capitalizing on these market opportunities has very little to do with addressing the core failures of our economic system.”
Given federal level gridlock and potential backtracking on many social and environmental issues in the U.S., “Impact investors will look at municipalities and states as local policy engines to further meaningful impact investing activity,” Andrea Armeni, executive director of Transform Finance told Locavesting. The move to more local impact investing could serve markets across Europe.
But as private capital moves more into the public sphere, says Armeni, “We will need to be careful in navigating the intersection between making up for what the government is not doing, and further starving public services to the benefit of private capital.”
Jobs, jobs, jobs
It’s the economy, stupid. In 2017, impact investors should double down on good jobs for rural communities and struggling cities, refugees and the formerly incarcerated.
Clean energy jobs have already surpassed fossil fuel employment in the U.S. Small businesses in cities and rural communities have created seven out of 10 new jobs since the 1970s. Community development finance institutions and impact investors like HCAP Partners are setting the standard for investing not just for jobs, but good jobs.
One challenge is getting more capital to talent outside of the traditional hubs. Ross Baird and Village Capital have some good ideas on creating businesses and good jobs. Calvert Foundation and U.S. Bancorp Community Development Corporation have backed Greenline Ventures to increase business lending in neglected U.S. communities.
“We are not working fast enough to solve domestic issues such as lack of access to education and sustainable job opportunities, both of which are key to a healthy democracy,” Lisa Kleissner, co-founder of KL Felicitas Foundation, told the Miller Center.
Impact investing is not just for finance, anymore
Look for the continued growth of impact investing outside of finance, writes Kristen Hull, CEO of Nia Global Solutions, as activists, artists, philanthropists and others look for new ways to drive change. “Impact Investing is being seen as a way extend philanthropic missions, and expand capacity to make change, as many begin to literally invest into the world we each want to see.”
Devex has also flagged the trend of impact investing strategies at international nongovernmental organizations, faith-based social ministries, and aid organizations. In March, UNDP in Armenia will host one of the first conferences to explicitly bridge impact investing and international development.
Carolyn Woo, president and CEO of Catholic Relief Services, which last year made its first impact investment, explained why the nonprofit is embracing the tool. “CRS has taken some bold steps to become an active participant in the impact investing landscape, focused on leveraging resources, taking risks in new financing models, and helping to unlock entrepreneurial capital in the sectors and geographies in which we work.”
Risk of “greenwashing” grows
As more clients express interest and big funds dress up their offerings, we'll all have to watchdog the impact. “We are already seeing the big banks with large marketing budgets positioning themselves as impact investors, asserting that they are now the go-to place for banking with values, or investing with impact,” says Hull. “In many cases their marketing budgets are much larger than their meaningful product offerings.”
“Some of this demand is resulting in thoughtful product development and platforms,” she says. “However, we are also going to see quite a bit of green-washing from various stakeholders.”
That's not to say that different investments can't or shouldn't have different kinds or amounts of impact. One helpful approach was sketched by Ben Thornley of Tideline and Cathy Clark of Case i3 at Duke University in their Navigating Impact Investing project. The duo suggested investment managers segment “impact classes” in the same way they segment financial asset classes. Impact classes would group investments by intention, target beneficiaries and the type of impact evidence collected. That would let investors compare apples to apples in terms of impact expectations.
Photo credit: delfi de la Rua