Impact investing means different things to different people, but most agree it is the intention to generate measurable social and environmental impact coupled with a solid financial return.
The social and environmental impact portion of this definition has always been easier to achieve. Even in the early days of impact investing when it was narrowly referred to as Socially Responsible Investing (SRI), it did create meaningful social and environmental changes, most notably the adoption of the Sullivan Principles that helped to end the apartheid government in South Africa. The problem with SRI is with the negative screening it deploys on common themes for socially responsible investments, include avoiding investment in companies that produce or sell addictive substances (e.g. alcohol, gambling, tobacco, etc.), it also produced below market returns for its investors. This result prevented many of our nation’s pension funds from investing in a socially and environmentally impactful investments, due to ERISA’s myopic focus on a pension fund’s risk and financial return profile.
Impact investing has significantly evolved as an investment and risk management investment tool. It now has the ability to enable investors to reflect Environmental, Social and Governance (ESG) considerations in their investment portfolios without having to sacrifice potential returns. Strategies now span asset classes and issues such as climate change and access to finance, health care and education, letting investors simultaneously pursue both financial and nonfinancial goals. With the ability to achieve market like returns, pension funds are beginning to find ways to incorporate ESG strategies into their portfolios.
Much still needs to be done to make impact investing a mainstay in an institutional fund’s investment strategy but we have never been at a better place to push forward.