What New Challenges Does Impact Investing Face?
It has been a dozen years since the term ‘impact investing’ was first coined at the Rockefeller Foundation Retreat Center in Bellagio, Italy. Antony Bugg-Levine, the Managing Director at the time, recalled this was a term that justified specific investments made by for-profit businesses - particularly in addressing social issues like poverty or inequality.
Since then, the movement of impact investing has gone through many changes. However there are still several more distinct challenges, and of course an untapped potential for growth. Here is what we can expect ahead.
The more this movement comes to light, the more certain aspects of it will need to be addressed. One of the largest issues is the various definitions and classifications that form impact investing - and by extension ESG investing. Already people are either confused about what is and what isn’t impact investing, or may interchange the terms ESG investing and impact investing, thinking they’re one in the same.
The reality is impact investing and ESG investing are different - though both are ‘good’ - and are still being fine-tuned. Impact investing is best described by Bugg-Levine, the man who was in the room when the term was coined:
“[At its core] the simple idea of impact investing is that our for-profit investments are both an economically effective and a morally appropriate way to address a social problem.”
As for ESG investing, it’s more represented by the score or rating the company has. Even though both forms are addressing social issues, impact investing relies more on your own personal feelings about a certain company. ESG investing is perhaps more on the value you place on a rating formed through extensive data collection.
Even so, both definitions are still being scrutinised. This is the case when it comes to policy making in government, where there needs to be clearly defined outlines. Until we clearly understand that ESG is a framework, and impact is a strategy, there will be ongoing confusion that limits the adoption of either.
Another large disconnect between this movement and people is that we all have a hard time realising the good that’s created when it’s written into policies or through politics in general. If you want millions of farmers to improve crop output and enrich their lives, you’re going to need money on a much larger scale, so much money that it would exceed what’s available in government or through philanthropic sources.
The cruel irony to this is Bugg-Levine realised years ago that there is enough capital around, sitting in capital markets. There is enough to make a big difference provided that the right people who were making big changes got the funding they needed.
Even with this solution of funding the right people, there are still inherent issues. There can be bad actors who greenwash their campaigns or what they represent, or there may be companies that try to double dip by doing socially irresponsible work under the guise of being responsible.
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Between the ignorance or confusion of politicians, the scandals, and hefty fines for greenwashing, the US Republican party has been focussing on ESG now more than ever. This results in impact investing being put under fire as well, since Republicans don’t want people to feel socially responsible for their investments.
For decades conservative parties have positioned themselves as gatekeepers to the status quo, and that personal sentiment shouldn’t inform investment decisions, rather that the ‘invisible hand’ of market forces will decide best.
Anything that tries to rock the boat is met with heavy resistance and steady politicisation. This is a growing challenge that’s further problematic given the loose definitions that ESG investing and impact investing have.
The Next Phase
The rise of these particular problems all stems from ‘Phase Three’ of impact investing. Much like any large scale movement, there are a number of phases and specific problems that come with them. For impact investing, it’s gone through some very distinct phases:
The first brought in innovators who created mission statements, developed small investment funds and products outside of the general public.
The second phase brought in mission-motivated people who brought all of those funds and products public. There were experiments but they were all small.
The third phase we are currently in is at the cusp of public integration. A growing number of people own a good amount of wealth from this and are encouraging fund managers, wealth advisors, and institutional investors, to begin providing these services.
This third phase is interesting because it doesn’t necessarily consist of everyone being ‘invested’ in impact investing. Rather, they recognise this is the next major opportunity within the stock market. That this is a prime opportunity to increase sales and boost customer relationships.
All of this is a good thing, but not without its challenges. As the movement continues to scale up, more and more people will treat this form of investing as second nature. There will be pushback - now and more in the future - but with the steady growth of people understanding what this movement is all about, change will happen.
What matters the most right now is that the growth is scaled with integrity in mind. That careful thought and deliberation is put into every decision. From policy to our own personal decisions, keeping it honest is one of the best answers to address these challenges and the many more that will come.
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