Political headwinds are serving as a wake up call for the growing movement of investors and activists using the capital markets to curb climate change, eliminate global poverty and close the gap on income inequality.
Stripped of the comforting support of a sympathetic President Obama, investors and advisors seeking demonstrable, measurable impact on social and environmental challenges are choosing whether to shy away – or double down.
“This shift in political landscape is a call to action… to focus the power of thoughtful and responsible capital markets facilitating solutions to the most critical imperatives of our time,” Erika Karp, founder and CEO of Cornerstone Capital, a sustainable investment advisor and asset managers, wrote in a note to clients.
As we enter 2017, here are six opportunities — and one risk — for investors driving the shift toward a more sustainable and inclusive economy.
1) Global Goals as an organizing framework
The U.N. Sustainable Development Goals aren’t just an obvious unifying framework for impact, they’re a compass to new market opportunities worth $12 trillion in annual cost savings and revenues.
Yes, there’s yet a finance gap to fill if we hope to achieve the goals [see the GIIN’s call to action to impact investors to help fill it.] “Impact investment is coalescing around the SDGs as being a way of almost articulating and branding what impact investment is all about,” Nick O’Donohoe, senior adviser at the Bill & Melinda Gates Foundation, told Devex.
Investing in SDG-aligned issues including health, energy and ending poverty is also a directional bet, one now being made at the highest levels. PGGM, along with APG, one of the world’s largest asset managers, is shifting assets to align with the goals. UBS has carved out $5 billion for SDG-aligned investments. Sonen Capital, which manages about $400 million in client assets, uses the SDGs as a framework to measure and communicate impact.
2) Turn the spotlight to impact
Blackrock, Bain, TPG: the news has been on the big investors and big funds entering the market. In 2017, the conversation should emphasize impact. “Is social entrepreneurship really making a dent in the big problems facing the world today? 2017 would be a good time to talk about this,” Harvey Koh, managing director of FSG, told the Miller Center.
Bridge International Academies, a consummate impact investing proof point, came under fire in 2016 for the performance of its low-cost private schools in East Africa (NextBillion has a recap of the punch and counterpunch). The impact of digital financial inclusion and mobile payments is under more scutiny. Will it suffer the same trappings as microfinance? Or does recent evidence suggest digital money is indeed, pro-poor?
Let’s take it up a level: Can impact investing help blunt, and turnaround, the dislocations and inequalities caused by globalization and technological advances? If impact investing is indeed mainstreaming we’d better make sure it’s delivering…impact.
“In any given year, financial returns can go up or go down. Up, we feel great; down, awful,” said Adam Bendell, CEO of Toniic, told the Miller Center. “Measured impact also has volatility, whether you look for social impact or carbon reduction.”
3) Broaden the focus from impact to justice
From the refugee crisis and prison reform to black lives matter and Standing Rock, 2017 should bring a sharper focus on social justice. “Is 2017 the year [social entrepreneurship] & [impact investing] evolves from [impact] & focuses on justice?” Martin Montero wrote in a Tweet. in January.
The push is on philanthropy. The Ford Foundation, an impact investing pioneer, under Darren Walker is doubling down on social justice. Dorian Burton and Brian Barnes warn in SSIR, “A framework rooted in charity alone ignores past realities that forced communities into oppressive situations, and risks reinforcing givers’ lack of understanding with rewards that recognize their benevolence.”
The same could be said of impact investing’s “impact” framework. As impact investing goes mainstream and “impact” becomes “just good business”, Aner Ben-Ami of Pi Investments reminds us, “capitalizing on these market opportunities has very little to do with addressing the core failures of our economic system.” For every investment we make, says Ben-Ami, we should ask ourselves ”is this a strategy that helps re-define who wins or loses in our economy?”
4) Go local
Given federal level gridlock and potential backtracking on many social and environmental issues, “impact investors will look at municipalities and states as local policy engines to further meaningful impact investing activity,” Andrea Armeni, executive director of Transform Finance told Locavesting.
But is private capital moves more into the public sphere, says Armeni, “We will need to be careful in navigating the intersection between making up for what the government is not doing, and further starving public services to the benefit of private capital.”
5) Jobs, jobs, jobs
It’s the economy, stupid. Impact can drive returns but it can also drive the creation of good jobs for refugees, rural communities and struggling cities. In 2017, impact investors should double down on job creation.
Clean energy jobs have already surpassed fossil fuel employment in the U.S. Small businesses in cities and rural communities have created 7 out of 10 new jobs since the seventies. Community development finance institutions and impact investors like HCAP Partners are setting the standard not just for jobs, but good jobs.
One challenge is getting more capital to talent outside of the traditional hubs. Ross Baird and Village Capital have some good ideas on creating businesses and good jobs in in the red states between the coasts. Calvert Foundation and U.S. Bancorp Community Development Corporation have backed Greenline Ventures to increase business lending in neglected U.S. communities.
“It has to be mentioned that the recent U.S. election underscored the importance of our work,” Lisa Kleissner, co-founder of KL Felicitas Foundation told the Miller Center. “That we are not working fast enough to solve domestic issues such as lack of access to education and sustainable job opportunities, both of which are key to a healthy democracy.”
6) Take impact investing further outside of traditional finance
Investing for measurable social or environmental benefits and a financial return is inching into the financial mainstream.
But look for the continued growth of impact investing outside of finance, writes Kristen Hull, CEO of Nia Global Solutions, as activists, philanthropists and others look to the trending tool to create change. “Impact Investing is being seen as a way extend philanthropic missions, and expand capacity to make change, as many begin to literally invest into the world we each want to see.”
Devex has also flagged the trend of impact investing strategies at international nongovernmental organizations, faith-based social ministries, and aid organizations. In March, UNDP in Armenia will play host to one of the first conferences to explicitly bridge impact investing and international development.
Carolyn Woo, president and CEO of Catholic Relief Services, which last year made its first impact investment, explained why the nonprofit is embracing the tool. “CRS has taken some bold steps to become an active participant in the impact investing landscape, focused on leveraging resources, taking risks in new financing models, and helping to unlock entrepreneurial capital in the sectors and geographies in which we work.”
7) Risk of “greenwashing” grows
More interest, more products, more capital. As more and more investors enter the market we’re bound to rehash old debates, and surface new ones, about impact investing’s definition, says Hull.
“Some of this demand is resulting in thoughtful product development and platforms (One such platform is Investibule, making impact investment accessible at low minimums),” writes Hull. “However, we are also going to see quite a bit of green-washing from various stakeholders.”
Watch the Omidyar Network-backed Navigating Impact Investing project from Tideline and Duke University. Last year the duo released a report introducing impact classes. The project suggests investment managers segment investments by intentions of the capital, the type of impact evidence collected and the target beneficiary. “In the same way asset classes cluster investments by the way they deliver financial return, impact classes are intended to cluster investments by the approach they take to delivering impact,” says the report.
This post was originally published on ImpactAlpha.com
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