By Eddie Gandevia, Fellow of the Center for Responsible Business, Entrepreneurial Finance Fellow, MBA 17
The annual SRI Conference, now in its 26th year, is a gathering of investors, advisors and intellectuals who are leading the charge in sustainable, responsible, impact investing (or “SRI”). What began as an idealistic gathering of 60 industry professionals 26 years ago to discuss how capital markets can be a force for good, has grown into a one of the most disruptive movements in finance over the last decade.
The governing theme for the conference, “All in for Impact”. recognized that we are at crucial moment in the history of the SRI movement – a tipping point – marked by rapid adoption of SRI principles and products within mainstream financial markets. As Joseph Keefe from Pax World Investments put it, “our movement is real and its growing big time.”
This blog post sets out the key forces that are driving this acceleration, and poses the critical question, what is the next frontier – in the words of conference organizer Steve Schueth, “how do we continue to lead?”
THREE DRIVERS ACCELERATING SRI: FROM A MOVEMENT TO MAINSTREAM
- Critical Regulatory Wins
Key regulatory announcements in the past several months, including the Department of Labor’s declaration on October 22, have clarified that 401(k)s and philanthropic foundations may consider environmental, social and governance (ESG) factors in their investment process. This releases a major perceived barrier for fiduciaries, providing the gateway for Americans saving for retirement and foundations to invest for both social and financial return.
- Major Adoption by Mainstream Capital Allocators
The US Forum for Sustainable and Responsible Investment (US SIF) reports that more than “one out of every six dollars under professional management in the United States—$6.57 trillion or more—was invested according to SRI strategies.” On top of this, within the last year, major investment firms have made bold moves into the Impact Investing arena. BlackRock, the biggest money manager in the world, started selling its BlackRock Impact U.S. Equity Fund (October 13), and earlier this year, Goldman Sachs announced the acquisition of Imprint Capital (a NY based Impact Investment Private Equity firm), alongside announcements from leading Private Equity firm Bain Capital, and insurance firms Axa and Zurich each launching dedicated Impact Investment strategies.
No longer can sustainable, responsible, impact investing be considered a niche strategy – the tipping point is upon us – with further acceleration and adoption to come.
- Investors are Demanding it
With ever increasing awareness, public discourse and social sensitivity to the social and environmental challenges facing the world, both high net-worth and retail investors are demanding ESG factors be a key consideration in their investment portfolio. The U.S. Trust reports that 58% of all high-net-worth investors, 71% of women and 85% of millennials indicate that the social and environmental impact of their portfolio is important to them.
With increasing pressure to reform a financial system that has contributed to growing income inequality, the social media empowered investor will continue to pressure Investment Managers to develop financial products that seek to generate “competitive returns while creating a just local, national and international society” (Keefe, Pax World Investments).
Therefore, what is the next frontier for the SRI movement? How can it continue to promote and preserve the mission to direct the power of global capital markets to solve the greatest challenges facing our planet?
THE NEXT FRONTIER: THREE CRITICAL ENABLERS OF SCALED IMPACT INVESTMENT
As John Streur, CEO of Calvert Investments reminded the conference attendees, the world’s challenges remain: each day around one in three people live without clean utensils, one in six are without electricity, and one in seven suffer from hunger. The speed with which the world can address these problems will rely heavily on our ability to harness three critical enablers of the Impact Investment space.
- Standardizing, measuring and proving impact
Significant progress has been made in the effort to define, standardize and measure impact, led by firms such as the Sustainability Accounting Standards Board and the Global Impact Investment Network. However, with an increasing array of public markets and alternative investment products claiming to produce social and environmental returns, there is a crucial need for standardization and measurement practices to be established.
Beyond simply defining and measuring impact, there is a need to continue to establish the connections between strong ESG performance and financial returns – an area the academic community plays a major role. Administered by Haas’ Center for Responsible Business and announced each year by Lloyd Kurtz at the SRI conference, The Moskowitz Prize, is the only global award that recognizes outstanding quantitative research in socially responsible investing (SRI). This year it recognized Philipp Krüger’s work establishing that markets value transparency regarding corporate climate change risk.
When asked what the most critical enabler would be to scaling the impact potential of capital markets, panelists agree – it is the combination of mass adoption of common reporting and measurement practices with declarative research on the connection between impact measures and company performance.
- Continued product and platform innovation to aggregate and deliver impact assets
In order to enable the key economic growth engine in emerging markets, new investment models and products will be required. The “missing middle” is a term adopted by economists referring to the lack of funding for small to medium sized businesses.
This is leading to innovations that are creating the ‘pipes’ and ‘products’ required to deliver this capital at scale. Three noteworthy examples on display at the SRI conference:
1) Impact US Marketplace is building an online platform of curated impact investment opportunities – connecting willing investors with frontline investment opportunities.
2) The Caprock Group has been developing iPAR, a software platform for their clients to select their specific portfolio of impact assets based on their theory of change, key regions of interest and individual investment firm ratings leveraging the GIIN’s IRIS impact investment framework.
2) ImpactAssets and The Calvert Foundation provide a fixed income product that aggregates capital and delivers it to a multitude of businesses and NGOs operating in underserved communities in the U.S. and around the world.
- Leveraging the full potential of philanthropic capital
The F.B. Heron Foundation and The Kresge Foundation, leaders in the philanthropic funding community, strongly advocate for shifting the mindset towards seeing this capital base as a single vehicle for generating impact. With more than $1 trillion dollars are held by foundations or donor advised funds representing a major source of values-aligned capital.
However, regulation only mandates 5% of that capital to be deployed each year, with the remaining 95% typically residing in traditional investment vehicles. In some cases, this means the 5% draw can be funding philanthropic efforts aimed at combating the effects of companies the foundation is inadvertently invested in with the other 95% (think: funding climate change advocacy efforts while being invested in the largest oil producers).
There is a moment in time in every successful movement where it crosses the chasm from the minority to the masses. It was an enormous privilege to be at the SRI Conference where this moment was being celebrated among a group of dedicated pioneers, and I feel great responsibility to play my own part in pursuit of this next frontier to ensure the world’s capital is a force for good.