*Co-authored by Jed Emerson, ImpactAssets
One of the interesting and important recent developments in wealth management has been the emergence of a group of clients committed to investing with impact across their entire portfolios, meaning they seek to deliver measurable positive social or environmental benefits with every dollar they put to work.
This includes high net worth individuals, often from the millennial generation, such as Leisel Pritzker Simmons and Ian Simmons, family foundations like the KL Felicitas Foundation, and philanthropic institutions like the F.B. Heron Foundation.
For any large investor, this "100 percent for impact" approach requires a significant commitment of time and effort to identify and vet a range of strategies, from public market investments that screen companies for high performance on social and environmental criteria or emphasize active shareholder engagement, to smaller private equity or debt funds providing capital to companies whose core mission is to create positive social outcomes through their products, services or operational approaches (in addition to linking philanthropic capital to their investments). Investors leading this charge are proud to construct portfolios in which they can identify choices for every asset class and are also starting to reap market-rate and sometimes market-beating returns. These are the pioneers of impact investing and we laud them.
But these especially committed individuals and organizations are just the tip of the iceberg in a larger movement. In fact their efforts build on decades of investing for impact. This includes by institutional investors who have utilized impact screens and shareholder activism as a risk reduction strategy over the past 30 years, and are finding ways to promote the environment through vehicles like green bonds, and through the vibrant work of intermediaries building products with specific outcomes in mind, including for renewable energy, affordable housing, accessible water, better health care, or higher incomes for underserved people and communities. And screening for environmental, social and governance factors is now a part of many global stock exchanges.
There is a lot of talk about "mainstreaming" impact investing, as if the practice is inherently distasteful and requires a special marketing campaign. But when you study what's really going on in the world of finance today, as the three of us have from our different vantage points, what we see is the emergence of a new kind of capitalism, one that looks squarely to the future needs of the planet and to finance as a means to help achieve them.
As James Gorman, Morgan Stanley President and CEO, said on launching Morgan Stanley's Investing with Impact platform and Institute for Sustainable Investing last November: "Our clients are increasingly turning their attention to what it takes to secure the lasting and safe supplies of food, energy, water and shelter necessary for sustainable prosperity."
What are the key elements that link impact investing with finance? In our new book, Collaborative Capitalism and the Rise of Impact Investing, we describe the emerging tenets of a new, impact-driven capitalism:
- An outcomes orientation: bringing additional rigor to an investor's understanding and management of the ultimate effects of its capital on people and communities;
- Transparency: sharing of information and practices to better align the strategic motivations of both those supplying capital and those receiving it; and
- Attention to constituency: which emphasizes the clear social and economic value in building relationships with multiple cross-sector stakeholders and acting on their feedback.
Whatever words you prefer, these concepts are blending into the mainstream practices of finance, sometimes slowly, sometimes quite rapidly.
As the movement takes shape through the practical implementation of investment strategies, products and relationships that integrate these concepts, we predict confusion about the exact definition or parameters of impact investing will fall by the wayside. For now, the visible iceberg of impact investing may get much of our attention, but we urge everyone to look below the waterline for the big picture -- the ramifications for business and investment writ large are significant.