Features | January 13, 2020

Three ways asset owners can shift mindsets, incentives and portfolio theory

Amit Bouri
Guest Author

Amit Bouri

ImpactAlpha’s What’s Next series, produced in partnership with the Global Impact Investing Network, provides a platform for practitioners and experts to reflect on the future of impact investing.

ImpactAlpha, Jan. 13 – Capitalism, in its current form, is not serving our planet or its people. The climate emergency and our worsening global inequality make this painfully clear. 

And yet, the malaise of the status quo is beginning to spur important change. A growing number of consumers are intentionally buying more sustainable products and boycotting companies that do not align with their values. The Business Roundtable is now acknowledging that the needs of shareholders must be balanced with the needs of customers, employees, suppliers, and local communities. Protesters the world over, from Chile to Lebanon, are demanding a more inclusive and sustainable system.

At the Global Impact Investing Network, we see such actions as harbingers of a ‘new normal.’ We envision a world where finance plays a central role in solving the biggest challenges facing the global community. We envision a future in which social and environmental impacts are integrated into all investment decisions. The growth of impact investing indicates that many others have similar goals.

Indeed, impact investors are already modeling many of the behaviors that the broader financial community can emulate as society moves toward a new iteration of capitalism.

But to achieve the systemic change we seek, impact investors and the broader financial community must make even deeper shifts – shifts which are outlined in the GIIN’s Roadmap for the Future of Impact Investing. Some of these changes are technical in nature; others are conceptual adjustments. By stepping up as leaders prepared to confront the world’s challenges, impact investors can blaze the trail toward a new standard for investing that is better suited for our planet and our future.

Reshape mindsets

We must launch and support campaigns aimed at reshaping mindsets about the role of capital in our society – campaigns that cast financial capital as the transformative force for good we know it can be. The GIIN and other field builders are important champions of this mindset shift, but we need a much greater variety of voices in the choir.

We need the grassroots and the grass tops. Together, we can build a broad social mandate for a sustainable financial system. Together, we can begin to transform the outdated systems underpinning our global economy.

These efforts begin with asset owners; after all, their demands and priorities influence the actions of asset managers across the board. From the grass tops, the campaigns must encourage owners both to demand information about the impact of their investments and, then, to highlight those impacts to the world at large. Larger asset owners can use their concentrated influence to require that asset managers and companies transparently report the social and environmental impact performance of their activities and can move capital accordingly. 

From the grassroots, anyone with a savings account can ask what criteria their bank uses to lend and invest their capital – and then, can choose a bank that invests their hard-earned savings in line with their values. 

Align incentives with impact

Incentives drive behavior in any business, and the conventional capital markets typically link decisions about asset allocation and compensation to financial performance. We need a similar link to impact. Asset owners should update their incentive structures, so that allocation and compensation are directly tied to impact performance. They might require, for example, that impact targets be met to receive further investment or more favorable investment terms. They might also link employee compensation to certain impact metrics.

This may sound like a radical idea, but we already see signs that it is beginning. In early 2018, the CEO of the world’s largest asset manager, BlackRock, announced that companies will need to demonstrate a positive contribution to society in order to receive investment from the firm. Such lofty goals still must be brought into real-world practice, but they represent a meaningful start on the path toward impact-aligned incentives.

Some impact investment firms are already tying “carry” to impact, including Vox Capital, the Media Development Investment Fund, and GAWA Capital Partners. It is time for more investors to lead in this way. As impact-focused investing is incentivized, more investors and business leaders will be driven to find new ways to create positive impact.

Add impact alongside risk and return

Re-aligning incentives and re-imagining the role of financial capital in society are actions that all of us can take – or begin to take – right now. The systemic shifts we seek must begin in conceptual ways we first come to learn about and understand investing: We must update fundamental investment theory to integrate impact alongside risk and return. 

Leading impact investors are already hard at work on this issue. Members of Toniic’s 100% Impact Network, for example, have moved beyond the traditional “Modern Portfolio Theory” to a more modern, more inclusive “Total Portfolio Theory.” Such adjustments infuse impact considerations – which, for too long, have been ignored as “externalities” – into every investment decision. In time, we believe that students in business and finance will be taught a more complete model of investment performance that includes all three relevant dimensions: risk, return, and impact.

At the GIIN, we believe that impact investing has a central role to play in the broader push for meaningful change across the global financial system. With these three actions represent concrete steps we can begin acting on today and theoretical changes that will play out over decades. Taken together, they underpin the systemic shift toward toward a more inclusive, more sustainable future through financial markets that truly serve all members of society.

Amit Bouri is CEO of the Global Impact Investing Network