Doing well by doing Good
Since the rapid financialization of our economic system about half a century ago, investors have been designing and utilizing various investment strategies. Ranging from stock investment to venture capital injections to hostile takeovers, the chosen strategy was the means to an end: a superior financial return on investment. Over the last decade, however, another investment strategy has surfaced and swiftly found its way into investor portfolios. That is, impact investment is destined to become the single most important investment vehicle in the years to come.
Impact investment is not only a means to an end, but an end in itself.
Defined by the Global Impact Investing Network (GIIN) as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return”, impact investment is not only a means to an end, but an end in itself. Whilst it recognizes a financial return must be obtained – it would, after all, be foolish to simply throw away money – there is also a clear focus on the societal impact made. The field is not just a niche anymore; every serious asset management firm is now engaged in impact investment – giants like BlackRock and Goldman Sachs amassed some $77 billion in available funds last year.
So what drives the growth of impact investment? Theories and speculations may vary, but the essence boils down to the same phenomenon: vast environmental and societal challenges urge investors to rethink investment in order to bring about positive change to the international community. From climate change to growing inequality, impact investment seeks to remedy adverse trends by engaging in a long-term, positive value-creation view.
The technicalities of how exactly this can be achieved is well beyond the scope of this article, but it is perhaps worth noting that the rise of impact investment coincides with the adaptation of the United Nations’ Sustainable Development Goals (SDGs), a set of seventeen global goals to “transform our world” to be achieved before 2030. To achieve the goals (e.g. zero hunger or quality education), a vast amount of financial capital is required. Most of that capital, however, currently resides in private hands. Triodos, one of the well-established sustainable banks in the Netherlands, recognizes that linking societal benefit to private gain (i.e. impact investment) is quintessential in unlocking these funds, thereby enabling investors to “do well while doing good”.
The funding gap, however, also constitutes the greatest challenge impeding the full embracement of impact investment. In his seminar at the London School of Economics, the president of the World Bank, Jim Yong Kim, emphasized that trillions of dollars are currently piled on bank accounts of private investors, sometimes even earning significant amounts of negative interest on the deposits. If impact investment is indeed the fruitful mechanism it alleges to be, why then are those funds not invested? The World Bank president proposes that investors are too risk-averse still. Since impact investment often finds its way into areas which are politically unstable – as those areas are in greatest need of help – the accompanied high political risk significantly reduces its attractiveness.
If impact investment is indeed the fruitful mechanism it alleges to be, why then are those funds not invested?
Whilst the genie of impact investment is thus out of the bottle, much work can and needs to be done to allow it to have the largest impact. Profound challenges facing mankind call for sophisticated solutions. Linking impact investment to the Sustainable Development Goals clearly helps bridging the moral justification with financial gains. If non-governmental organizations and governments find ways to depoliticize investment projects (for instance by collaborating with institutions in the target country) or reduce its perceived risk (for instance by committing to absorb part of potential losses), it should be only a matter of time before billions or trillions of funds are channeled to impact investment. If that leaves sufficient time to achieve all goals remains yet to be seen, but it is obvious that the ripple effect shall lead to a bigger impact on the international community nevertheless.
