Impact Investing is a simple idea that is taking the world by storm. In the last few years there has been a wave of interest in Impact Investing, and a wave of actual investments. But what is Impact investing? Why is it important? And why is it so important now? Lets dive right in and find out!
Today, most Americans invest in stocks, either directly or through mutual funds or other financial “instruments”. Back in the 1970s few Americans owned stocks. But as the stock market continued to rise faster than inflation, money slowly moved out of safe but poorly performing bank accounts and into Wall Street. Pensions evolved into 401Ks, and their managers turned away from low interest US Treasury notes and invested in stocks, bonds and more exotic investments.
As money migrated to financial investing, individuals who selected haw the money was invested gained immense power. Some large individual investors, calling themselves “activist investors”, wanted to do more than move their money from one firm to another. They wanted to set conditions for their investment, setting goals and timelines for corporate changes. Big funds and big investors realized that their enormous economic power could change the world.
Every corporation has different goals, which are often usually stated or implied in their financial reports. By creating published rules for their portfolios of stocks, bonds, and investments, funds can follow “themes”. One fund might only invest in South African bonds. Another may only buy technology stocks. Yet another may have a mandate to select higher risks investments, with better that average returns. Once portfolios are assembled thematically, non-professional investors can pick one fund (that is professionally managed) rather than researching, buying and managing their own portfolio.
Consider the Teachers Insurance and Annuity Association (TIAA), the pension and insurance fund for teachers in America, with over $600 billion in assets! You can get a lot of companies to do what you want when you have that much money to invest. But TIAA is unique. TIAA may be answerable to millions of teachers, but those teachers are answerable to… kids.
Kids do ask the strangest questions. In the age of Google, they can ask very POINTED questions. Like… “Does teachers invest in guns?” “Why don’t you put more money into renewable energy?” “You invest in company ‘X’? Aren’t they big polluters?” “I saw a terrible new story about sexual harassment at company ‘Y’. The story said that your pension fund invests money in them. That’s not true, is it?”
These questions shaped how TIAA invested, over time divested itself of perfectly mainstream investments with questionable ethics. Later, NUVEEN became a TIAA company, and set up funds that were explicitly “Good Guy”, with over $20 billion worth of Impact Investments.
Did TIAA create Impact Investment? Not really. Unlike superhero movies, the origin story for Impact Investing involves more than just a spider bite.
TIAA and firms like it are one important thread in the story. But equally important is the rise of the Millennial. These young investors constantly face crises… the global financial crisis, climate change, China, globalization, school shootings (from Columbine to tonight’s latest shooting, these kids ARE Millennials), war between the Republicans and Democrats, immigration, school loans, government debt, their debt! The list is long.
Yet, the Millennial is used to the world… at least the on-line world… constantly innovating and changing to meet their needs. Shouldn’t their financial firms do the same? A quick search of the internet reveals search tools that rate firms by social value, by adherence to social investment principles, and similar “good guys” metrics. Organizations like GIIN (Global Impact Investment Network) promote and report on Impact Investment. New organizations are appearing almost every day.
A third thread leads to the United Nations. Since the creation of the United Nations in 1945, the relationship between world peace and the economy has been a regular item of discussion. After WWII, the world began rebuilding shattered nations. By the late 50’s, underdeveloped nations became the new battleground. Poverty, famine, and corruption were creating wars, revolutions, and mass migrations.
If poor nations could be developed, much misery could be avoided. But the lack of transparency in these nations led to corruption, unenforceable deals, and lost capital. Without transparency, there would never be enough deals from good governments and good companies to raise up the standard of living in poor nations.
The start of the new Millennia looked like the right to make a big move. In September of 2000, the United Nation hosted the Millennial conference in New York, and the Millennial Development Goals (MDG) were created. These eight goals promoted education, gender equality, health, human rights, and economic development. Few rejected these goals. Instead, some said that they lacked the funding. Enter the early pioneers of Impact Investment.
Of course, the UN did not stop with MDG. By 2015, MDG was expanded into 17 goals, called the Sustainable Development Goals (SDG). It also led to ESG:
- Environment: Don’t intentionally do harm to the environment. Extra points for you if you have positive policies for recycling, and other environmental issues.
- Social: Corporations and governments are responsible to their communities, both inside and outside their organizations. Support employment and education, and you’re a good guy. Grow through bribery, corruption, and sexual abuse, and… you’re not.
- Governance: How do you run your organization? How many women and minorities are on your board of directors? Your senior management? How are whistle blowers treated? At a time when the US has nearly zero unemployment, well treated workers ARE a competitive advantage.
There are different estimates of the size of US Impact Investments. Should we just count the assets in funds that are explicitly “Impact Investment”? Or should we include all funds with similar goals? A common, but conservative, market estimate is at least $300 billion. A staggering amount, but it is only the beginning.
The US Social Investment Foundation uses a broader measure, including ESG. By the start of 2018, their measure of SRI (Sustainable, Responsible, & Impact investing) rose to $12 trillion. Yet another group, the PRI (Principles for Responsible Investment), tracks ESG signatories. The list, so far, includes over 1,200, asset managers, investment managers, and service professionals.
In just the US, ESG signatories include such prominent names as: the AFL-CIO, Alliance Bernstein, BlackRock, Kohlberg Kravits Roberts, Legg Mason, Mellon Capital, Neuberger Berman, Nomura Capital, Prudential Real Estate, Rockefeller Asset Management, and Turner Investment Partners. Add to this government retirements funds for Connecticut, (over $32 billion), Illinois, Los Angeles (nearly $60 billion), New York city and New York State. Europe has even more signatories, and more pension funds. Consider that the world’s government pension and insurance funds are valued at more than $18 trillion!
That’s a tsunami of money, and its washing up on the shores of nations around the world! If a tsunami can reshape the shoreline, this monetary tsunami will reshape politics and economies around the world. Or at least that’s my Niccolls’ worth! What about you? What do you think about the future of Impact Investing? Feel free to share you opinions here!
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