‘Impact investing’ — the idea of doing good and making money at the same time — is reaching a tipping point of acceptance. The UN’s Sustainable Development Goals have provided a blueprint that is pushing impact investing into the financial mainstream.
Consider a few of our planet’s economic challenges. According to the Business and Sustainable Development Commission (a group of 35 corporate chiefs and civil society leaders) violence and armed conflict cost the world the equivalent of 9 per cent of global GDP in 2014 alone. Lost biodiversity and eco-system damage cost another 3 per cent. Meanwhile, median wages in developed countries have been stagnant for 30 years and there’s growing anxiety that automation and globalisation will continue to eat away at human jobs.
But the good news is that there’s a plan. In 2015, 193 countries (that’s pretty well every country in the world at the time) signed up to the Sustainable Development Goals, an ambitious framework for creating a better world by 2030. The 17 individual ‘global goals’ are designed to build the kind of future that most people want, including most investors: one without extreme poverty or gender inequalities, where there is universal access to healthcare, clean water, sanitation, quality education and affordable, clean energy.
If the SDGs sound ambitious, that’s because they are. As Lord (Mark) Malloch-Brown, the Business Commission’s Chair told me, ‘they’re complicated because the world’s challenges are complicated. The global goals tackle both the social side — poverty, hunger, human rights, employment and decent work — and the environmental side: climate change, sustainable consumption and production, biodiversity, the oceans.’
Naturally they will require vast sums of private and public money to implement: the Business Commission estimates costs of US$2.4 trillion a year. But the potential gains are even greater. When the Business Commission looked at just four areas — food and agriculture, cities, health, and energy and materials, they estimated up to $12 trillion per year in gains for the private sector. McKinsey has estimated that just achieving gender equality would add as much as $28 trillion to the world’s economy by 2025.
Investing for measurable social or environmental return is not new. Previous iterations include SRI (Social Responsible Investing) and ESG (Environmental Social and Governance) investing. The principle difference now is that impact investing means putting money into a company, fund or organisation with the intention of generating a measurable environmental or social impact alongside — not instead of — a financial return.
A ShareAction survey shows most institutional investors agree that working towards all 17 SDGs has a ‘high or medium potential’ to help them meet their investment objectives. These investors particularly identified infrastructure development, sustainable and inclusive economic growth, and climate change mitigation or adaption, as offering the highest potential for investment. Amit Bouri, chief executive of the Global Impact Investing Network, says that the difference the SDGs are making is that they provide a common language for businesses, governments, investors and citizens to talk about investments to tackle global challenges.
Let’s take a practical example. If a government wants to work with business to promote investment in women, they can focus on Sustainable Development Goal 5: ‘Achieve gender equality and empower all women and girls.’ The goal then has nine more specific targets and 14 indicators of success. Here’s Target 5B: ‘Enhance the use of enabling technology, in particular information and communications technology, to promote the empowerment of women.’ To that end, the government concerned might solicit the help of Mariéme Jamme, who was given away by her mother in Senegal and trafficked as a prostitute to Paris at age 16 — but went on to create iamthecode.org, which aims to train a million female software coders by 2030 and prevent what happened to her from happening to other girls at risk. Iamthecode.org collaborates with business, schools and libraries and creates digital clubs to teach coding to all ages. Investing in these coding clubs and teaching technology to girls across many countries contributes to several of the other SDGs relating to ‘quality education’, ‘decent work’ and innovation.
But is impact investing really moving out of the realm of altruism towards Wall Street and the City? Yes it is. The world’s biggest asset manager, BlackRock, now has an Impact division. Goldman Sachs has acquired an impact investment firm called Imprint Capital. Private equity houses such as Bain Capital, Palatine and TPG all have impact funds. Dutch financial institutions that together manage more than €2.8 trillion in assets have agreed to maximise SDG investing, as have six of Sweden’s largest institutions. UBS of Switzerland has committed $5billion of private client assets to the cause, and the World Bank has issued an SDG bond. The Roman Catholic church, under Pope Francis’s leadership, has added moral weight to the movement by dedicating $1 billion of its own capital towards impact investments.
While we’re still a long way from investment flows of $2.4 trillion a year, momentum is clearly building. Linsday Smart at ClearlySo, an investment bank ‘focused on social impact’, argues that purpose-driven companies are increasingly attractive as M&A targets. The online fundraising platform Just Giving was sold for £95 million in June to Blackbaud, a software supplier to non-profit organisations. SC Johnson, the US household products giant, last month bought two high-profile environmental brands, Method and Ecover, to sit alongside Mr. Muscle and Duck toilet cleaner in its portfolio.
But can investors really make decent financial returns in this arena? Cambridge Associates and the Global Impact Investing Network produce performance data on impact investment funds: one study from 2015 found that those launched between 1998 and 2004 performed in line with or better than the comparative universe of non-impact investing funds. Those invested in emerging markets generated a net internal rate of return of 15.5 per cent versus 7.6 per cent for non-impact emerging market funds.
Nick Moon of LeapFrog Investments, an impact investor, told me his firm recently celebrated a major milestone, ‘reaching 111 million people in Africa and Asia with essential health and financial services through our portfolio of 17 companies. On average the companies have grown revenues at 43 per cent per year. What this really says for investors is that they can confidently put the SDG agenda at the heart of their investment strategy and not compromise on commercial outcomes.’
One of LeapFrog’s investee companies is Cignifi, a fintech firm that creates credit histories through mobile data — and thereby responds to SDGs relating to ‘reduced inequalities’ as well as work and innovation. Cignifi uses mobile-generated algorithms to credit score over 100 million people in 13 emerging markets, giving them access to credit and insurance. One of ClearlySo’s UK investments,
HCT Group, is a bus company that has grown revenues at 12 per cent per annum since 2009 in a relatively flat UK market by reinvesting profits into transport services with social impact and training people from disadvantaged groups as drivers and passenger assistants. If neither credit scoring companies nor bus companies seem obvious investments for eco-warriors and human rights activists, the beauty of the SDGs is that they encourage a very broad church of professional investors and advocates to work together.
So how does the non-professional take a step into this arena? Most of the offers are currently available only to High Net Worth individuals, pension funds and institutions — but that’s beginning to change. Octopus Ventures is a venture capital firm that applies an ‘impact’ framework to managing and measuring its portfolio; its Titan VCT is now open to retail investors. Tribe Impact Capital, set up in 2016, is the first discretionary wealth management firm in the UK dedicated exclusively to social, impact, and responsible investment.
As this market develops, there will be many more choices. There is, after all, a powerful financial logic in the idea that rewards will accrue to those who back solutions to the planet’s greatest problems.
Edie Lush is co-host of a podcast on the Sustainable Development Goals launching in January