4 Essential Questions Impact Investors Are Trying To Answer
The Global Impact Investing Network (GIIN) has estimated the current market size for impact investment at $715 billion USD worldwide. It’s a clear sign that there is a growing interest in this area. However, with this form of investing still new - and introducing new elements to investing - there are many questions to be asked.
The Social Capital Markets (SOCAP) holds conferences that bring investors, entrepreneurs, and social impact leaders together to pool information and learn about this growing field. In one of their recent conferences, they identified key questions that impact investing should seek to address.
1. Can impact investing make a sizable dent in social issues?
With international collaboration on climate facing challenges, as evinced by yet another ‘last opportunity to start making progress’ in COP27, it’s understandable to be pessimistic and think that impact investing, well, won’t make enough of an impact. And the fact that in the recent SOCAP conference there wasn’t a clear answer to this question isn’t inspiring either. However, there are some aspects that can shed some light on how impactful this movement has the potential to be:
There is growing awareness that social problems persist in capital markets. The accumulation of wealth at the top and corporations focussing on shareholders over stakeholders with little regard for ESG values reveals this issue is tangled and unjust. More people are aware of this problem, but change is going to be slow.
Philanthropy isn’t enough. As US Impact Investing Alliance Executive Director Fran Seegull said “philanthropy is the runoff of a broken capital system. How can we expect a broken system to ameliorate what it created with scant grant dollars?” In other words, to make a larger change, new solutions that can create sustainable change are the answer. The question becomes how that happens.
People do like the idea of transforming capital markets into a force of social good. Capital markets right now pale in comparison to social impact investments. Capital markets totalled $436.2 billion in 2021. Meanwhile, the SDGs (Sustainable Development Goals), one part of impact investing, have seen a global growth of $12 trillion.
More resources will be needed. Another certainty is impact investing’s effectiveness will largely depend on its supporters. Currently, to achieve the UN’s Sustainable Development Goals by 2030, it’s estimated that $7 trillion will need to be invested each year.
2. Will this provide reliable returns?
The consensus to this question, similar to the previous one, is that it depends on the investor. This is still investing in the end, so risk applies, but there will likely be less risk involved, particularly with regard to long-term impact investments. And in terms of how much, investors are going to have to make trade-offs and make decisions on how much social impact and profit is enough for them. Eventually, each investor is going to have to prioritise one area over another.
History has shown that exploitative capitalism has indeed provided large ROI, yet this has been predicated on the externalised value of natural and human capital. Short-termism in profit expectations came at a price. Conversely, investment models that drive social impact aren't going to produce the largest ROI right from the start, the key lies in longer-term, safer opportunities. For investors, this phenomenon raises more important and tricky questions like:
What does leaving a social enterprise that’s addressing a social problem look like?
Should there be analytical and measurement tools involved?
How can social impact be tested or quantified?
Is it fair to compare capital market returns to the returns from impact investing?
How can greenwashing or impact washing be stopped (the practice of companies or individuals raising funds under false pretences by positioning themselves as environmentally friendly or pro-social good)?
Although challenging to define or answer, these points can affect the attractiveness of impact investing programmes.
3. In impact investing, who has the role of power and how can the impact be addressed?
In order to make changes to the capital market and address social challenges through it, it’s important to acknowledge that capital is power, and that there is an unequal distribution of it. Making dramatic changes currently means closing the racial and gender wealth gaps, and systematically addressing the stark socioeconomic inequity between white people and people of colour. At the national level, this means addressing immigration, federal and state policies, and mass incarcerations, amongst others. At the individual level, and in this case for the impact investor, this may mean prioritising projects that favour necessary change in the rules despite being potentially less profitable, financially, than other non-impact projects.
Addressing these changes will also come down to the position of privilege held by mostly white men in power, who have historically created the rules for how the economy is structured and how wealth is built up and distributed. This challenge, that of accepting the roots of modern inequity and addressing them, sits at the core of impact investing.
4. What comes next?
Even though there are glaring problems in the impact investing movement right now, the field continues to evolve and grow. And, as an investor, you can help shape the impact investing world by considering the following:
Prioritise the next generation of wealth transfers. In 2020, a transfer of $30 to 40 trillion will impact Millennials the most.
Address monopolies which have impacted our lives personally and continue to undermine democracy.
Invest in local businesses, unions, worker empowerment, and supporting living wages.
Make a point of building individuals and your own internal skills around understanding racial inequity, and how to build equity, within your organisation.
Allow and prioritise local community investment agendas.
Examine your own investment strategies: where is there potential for green or impact washing in the companies you support?
Boost the number of both people of colour and women in the investing world.
It's important to keep track of company ESG performance and which companies continue to provide transparent, open ESG assessment results. Follow our growing list to keep track of your preferred investment opportunties.