Every investor wants to realize the optimum return on investment (ROI) when putting money to work, or he or she will likely not contribute resources to the enterprise. To contribute strictly on a goodwill basis without any regard for profit is not called an investment—it’s called charity. But what if an investor could integrate the financial need for profitability with the humanitarian need to better the world?
According to the Global Impact Investment Network (GIIN), that essentially defines impact investing: “Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return” (www.thegiin.org). The desire—or some would say the need—for impact investing is growing and is expected to play an increasing role in the course of corporate governance.
$60 Billion AUM
According to the 2015 J.P. Morgan survey of impact investors, last year GIIN members had $60 billion impact investments assets under management. The investments crossed disparate asset classes, industrial sectors, and geographical regions. But what they all had in common was the application of significant sums of private investment capital to complement both public resources and philanthropic donations in addressing compelling global challenges.
ESG No Longer Taboo
In 2008, the U.S. Department of Labor issued an interpretative bulletin that effectively discouraged pension plan managers from considering environmental, social, and governance (ESG) factors in their investment planning. The concern was that such factors might promote social impact considerations at the expense of maximizing retirement benefits for retirees.
However, last year, the agency reversed itself by issuing new guidelines for ESG-factored investing. Under the new guidance, Interpretive Bulletin 2015-01, fiduciaries still cannot accept lower expected returns or greater risks, but may take ESG benefits into account as “tiebreakers” when investments are otherwise equal. According to Labor Secretary Thomas Perez, “Changes in the financial markets since that time, particularly improved metrics and tools allowing for better analyses of investments, make this the right time to clarify our position.”
Not Just “Do-gooders”
But aside from being a mere factor or tiebreaker relative to the health of an investment, ESG may indeed also impact the ROI itself. According to Darren Walker, chairman of the National Advisory Board on Impact Investing, “A growing body of evidence shows that these factors directly and significantly impact financial returns on investments.”
Still a Niche Market
While pension funds, insurance funds, development finance institutions (DFI), and other asset managers are increasingly applying ESG considerations in the course of analyzing fund investments, impact investment still remain a niche market in developed countries according to a report issued by McKinsey & Company: “As the impact-investing business has expanded, it has developed some growing pains. Impact-fund managers, who invest mainly in privately held businesses, are having trouble finding companies that are ready to put large amounts of capital to work. Evaluating those companies has proven challenging, too. They are highly diverse, spanning various sectors, levels of risk, and expected returns. And the numerous standards for measuring social and environmental impact can be overwhelming, even for industry specialists” (www.mckinsey.com).
Individual investors remain confused about the array of impact investing options in the marketplace, and some are skeptical as to whether nascent impact investment fund managers have the skillset to bring them the desired ROI. Nevertheless, as the growth over the past eight years demonstrates, impact investing is an encouraging trend for both managers and investors.