YASH RAJWANSHI – OCTOBER 16TH, 2019 EDITOR: ABHISHEK ROY
The Wolf of Wall Street paints a morbid picture of the world of high finance. Detailing the rise, life, and eventual decline of Jordan Belfort, the movie drives a stereotype of financial professionals that traditional media has capitalized on for years. The careless culture of drugs and sex portrayed by the movie builds upon an average person’s perception of stockbrokerage. Moreover, the individual finance professionals within the movie dedicate their lives to a single mantra: making money for themselves and their lavish lifestyles. As a pseudo-biographical film, The Wolf of Wall Street correctly details many aspects of what Wall Street culture used to entail, but fails to include a new growth within the industry. For the last decade, investors have been slowly working to mobilize capital and investments to reach more positive ends through impact investing. Within this realm, investors utilize ESG (Environmental, Social and Governance) criteria, social and economic lenses, and exclusionary investing to incentivize social responsibility. Although it’s relatively new, the field of impact investing is growing exponentially, and thoroughly understanding this new field will be crucial to having a socially responsible and complete investment portfolio.
The Global Impact Investing Network (referenced as GIIN) explains impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” Along with this general definition, a variety of lenses can be used under the umbrella of impact investing, including gender equity, climate consciousness, and education empowerment, among others. These lenses are also applied to a myriad of sectors within the international economy such as healthcare, microfinance, agriculture, renewable energy, and housing.
Specifically, there are three key characteristics of impact investing that reveal the nuances within this field. The first such characteristic is ‘intentionality’ or the intention of the investor to create a positive social impact through mobilizing capital. This is the central idea of impact investing, making the active decision to pursue the opportunity to create systemic change.
The second key characteristic of impact investments is their financial returns. Investors focusing on impact investing generally expect positive financial returns, or in layman’s terms, that the investments make money. Interestingly however, the level of profit that finance professionals expect from their impact investments can change based on asset classes or fund managers. A good example of this is the Strategic Investment Fund (SIF) started by the Bill and Melinda Gates Foundation in 2009. Starting as a $400M pilot, the fund now represents more than $2B. Despite this growth, the SIF claims that “the Gates Foundation never makes [Program Related Investments] for the purpose of achieving financial returns.” A report published by the SIF in 2016 even claims “the foundation invests even though it is likely to lose capital.” Although the SIF is a rarity, it represents the diversity of companies operating within the impact investing sphere. Other funds such as Deutsche Bank or J.P. Morgan maintain a focus on reaching profit milestones while also achieving impact-based goals.
The final and most controversial characteristic of an impact investment is the measurement of its impact on the world. Accurately documenting and communicating the social and environmental performance of investments is essential to claim a true “impact investment.” The key issue that arises with this documentation is the qualitative and subjective nature of an impact. For both individuals that believe in impact investing as a legitimate investment philosophy and those that refrain from doing so, standardizing the value of an impact remains an important step to furthering academic discourse in the field. Some general guidelines that the GIIN sets up for measuring impact are:
- Declaring the social or environmental objectives that an investment is attempting to accomplish.
- Using standardized metrics to set performance targets for these objectives.
- Utilizing Key Performance Indicators (KPI’s) to measure performance and optimizing specific parts of a business model.
- Reporting social and environmental performance in the context of the standardized metrics that were previously set.
Creating a standard metric for measuring impact remains the biggest barrier for pioneers of this field to penetrate mainstream investing. Even so, impact investing today is growing in size and popularity as more research into it reveals the benefits it can have.
To thoroughly understand impact investing, it is important to understand the current climate of the field, beginning with the biggest “competitors” within the industry. In broad terms, organizations within this field are financial institutions, private foundations, pension funds, individual investors, and NGOs. Each of these categories has more specified competition models, but the key ones to consider for a broad understanding are NGOs and financial institutions.
To start off the discussion, let’s look at NGOs. For example, the American Cancer Society just recently created BrightEdge, which is “the Philanthropic Impact Fund of the American Cancer Society,” with the goal of “[investing] in companies that accelerate access to lifesaving technologies for the patients and families ACS serves.” As previously discussed in this article, the Gates Foundation also operates an expansive impact-based investment fund. Within the nonprofit sector, many organizations are rushing to get involved in the space of impact investing. Seen as an opportunity for stable financial resources and an opportunity to incentivize and support startup ideas for social good, impact investing is growing to become the quintessential tool for these bodies to reach their objectives.
Within the private sector, a similar trend is emerging. Larry Fink, the CEO of Blackrock, the world’s largest investment firm, wrote in his annual letter that “every company must not only deliver financial performance but also show how it makes a positive contribution to society.” Likewise, UBS, a Swiss financial institution, has committed to investing at least $5 billion of private client assets to Sustainable Development Goal-related impact investing. Although NGOs and financial institutions are traditionally considered antagonists to each other in that they serve different bottom lines, they have also worked together to further investing in socially conscious causes. For example, in 2004, Al Gore created Generation Investment Management with the past head of Asset Management at Goldman Sachs, David Blood. Their stated purpose for creating the fund was “to deliver superior investment performance by consistently taking a long-term view and fully integrating sustainability research within a rigorous framework of traditional financial analysis.” Within ten years, the fund has grown to manage $18.5B and lead market research regarding sustainability trends in the current marketplace. In short, impact investing is taking over the for-profit and non-profit sectors and the reason is clear. The traditional beliefs that social good and financial returns are mutually exclusive or parasitical is being disproven by research from the world’s most reputed institutions.
For many investors in impact investing the argument supporting sustainability leading to higher financial returns is common sense; business practices that are proven to be better for communities and for the development of the public will likely be better for business performance as well because of their reliance on human resources. In recent years, what has changed and catalyzed the revolution into impact investing is the academic research that is beginning to catch up to logical reasoning. A 2015 research report, by Gunnar Friede and Timo Busch and published in the Journal of Sustainable Finance & Investment, found a “non-negative relationship between investing along environmental, social, and governance (ESG) factors and corporate financial performance.” To translate, the research looked at reports from the last 44 years regarding sustainable investing and concluded that close to 90% of these studies found that ESG investing and financial performance do not hinder each other. For even more conclusive proof, the WIRED database from the University of Pennsylvania concluded in a report that “researchers cannot reject…[that] market-rate-seeking impact investing funds perform the same as the index…above a 95% confidence level.” Research is continuing to prove the validity of impact investing as an investment philosophy, and this is leading to a direct response from the private sector.
Impact investing is growing exponentially. In recent years, impact investing has developed into a tool for companies to support entrepreneurs, further their social goals, and reach comparable financial returns on their investments. The investments being made by these large firms are yielding real-world impacts that are improving the lives of countless individuals around the world. Exploring such impacts and the philosophical implications of implementing impact investing represents another dimension for financial researchers to consider. As private institutions flock to the market and research continues to strengthen the case for sustainable investing, understanding the ins and outs of this niche within finance is becoming vital to thoroughly understanding the power of finance to change the world.
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