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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is co-founder and chief executive of the Global Impact Investing Network
Sixteen years ago, I gathered with investors at The Rockefeller Foundation’s Bellagio Center in Italy to shape what would become a transformative financial strategy: impact investing. Our motivation stemmed from an urgent need to address global challenges to our shared future.
This sense of urgency was fuelled by the global financial crisis of 2007 and 2008, which highlighted deep flaws in our financial system at a time when social and environmental issues were accelerating. There was a recognition that government action and philanthropy alone wouldn’t be sufficient to address them. A more sustainable future would require changing the way the world invested.
While various forms of responsible investing already existed, the practices were somewhat fragmented. By 2008, institutional investors, foundations and development finance institutions wanted to unify these approaches into a cohesive impact investing strategy — to enhance effectiveness and scale.
Today, impact investments total more than $1tn globally, as measured by the Global Impact Investing Network, the non-profit organisation I co-founded shortly after the Bellagio gathering.
They are backing affordable, climate-friendly solutions in energy, housing, food, healthcare, education, nature and more. By investing in these areas, we are not just seeking financial returns; we’re actively crafting a healthier, more sustainable world for our children and grandchildren.
However, $1tn is not enough, because the scale of the world’s problems defines the scale of impact investing’s ambitions. By some measures, $1tn is only about one per cent of the total assets under management globally. Why hasn’t this number grown bigger, faster?
I believe there are three main factors at play. First, there is scepticism about impact investments’ ability to perform financially. Second, there are concerns about greenwashing. Third, there is a lack of defined strategies for impact investing via listed equities — which has prevented investors from engaging a significant part of their portfolios.
However, these three factors are being addressed.
Impact investing can demonstrate its performance, with many credible investors reporting both impact and good financial returns while meeting their fiduciary obligations. In a survey of 305 impact investing organisations that GIIN will release in September, 94 per cent of participants say that both their financial performance and their impact performance met or exceeded their expectations. These findings are in line with GIIN research findings over the past 10 years.
94%Propertion of impact investors saying their financial performance and their impact performance met or exceeded expectations
First movers have also established reputable standards that help to address greenwashing fears. After the Bellagio gathering, Acumen, B Lab and Rockefeller Foundation assisted by Deloitte, Hitachi and PwC started developing a catalogue of standard impact metrics now broadly adopted and known as IRIS+. Then, in 2019, the International Finance Corporation launched the Operating Principles for Impact Management to provide investors with a framework for their impact management systems. These principles, which are now hosted at the GIIN, have 181 signatory organisations across 40 countries. While greenwashing will always need to be monitored, we now have practices, tools, and regulations that can give investors more confidence.
Finally, strategies for impact investing in listed equities are more defined and accessible these days. A working group of 101 organisations helped to inform our guidance for pursuing impact in listed equities, and our upcoming report indicates that impact investing in public equities is growing at a compound annual growth rate of 19 per cent.
Addressing these past issues should ensure a positive outlook for the future of impact investing.
I’ve met with large asset owners who are now looking after workers’ retirement savings, and their long-term interests, by adopting impact investing at scale. One example is the Danish pension group ABP, which has decided to target €30bn of impact investments by 2030, to address climate change and biodiversity loss, as well as local issues such as affordable housing.
In my travels, I have also spoken with foundations that are moving their endowment investments to align with their philanthropic goals. Here, an example is The California Endowment’s commitment to moving its entire $4bn endowment to impact investments, to support community health and wellness values.
And I have met with private wealth and family offices that are adopting impact investing strategies to amplify their positive impact, such as the Tsao Family Office in Singapore. They see it as a sound financial strategy and an opportunity to leave a legacy.
However, new challenges are arising. Politicisation, such as the “anti-woke” backlash in the US, is a distraction from the opportunity to engage the power of the markets to make social and environmental progress. And, despite good work on policy, a patchwork of regulations across countries can cause uncertainty about how to proceed.
Yet impact investing is a strategy that is suited for this moment. Early adopters laid substantial groundwork, building $1tn in impact investments. We’ll know what’s enough capital when we know all people have access to good jobs, economic mobility and a healthy world to live in.