Impact Investing as the New Mainstream for Long Term Value Creation
Updated: Jan 9, 2020
We are currently witnessing a shift from the traditional investing and ESG integrated responsible investing into the realm of impact investing. The Sustainable Development Goals (SDGs) present a significant opportunity for private investors to benefit from supporting this global agenda by allocating increasing amounts of their capital to high-impact projects that address these critical global challenges. Responsible Investment (RI) seeks to avoid harm; Sustainable Investment (SI) seeks to benefit all stakeholders in a general way, while Impact Investment (II) targets specific solutions and has impact criteria at the core of the investment decision making process.
Economic policies of past decades have according to some leading economists led to slower economic growth, massive debt accumulation globally, higher pollution levels and rising inequality on wealth distribution. This is where Impact Investment provides retail investors, pension funds and other institutional investors a new model and broader perspective into objective to build long term wealth for their stakeholders. We suggest incorporating long term purpose definition in strategic asset allocation decision making processes of institutional investors. Equally important for institutional investors ought to be considering the potential positive and negative impacts of their investment decisions over the long term instead of current focus on short term profit maximization and accumulation of wealth. A new framework for sustainable impact investment is needed, highlighting the move from the short term shareholder model to the broader stakeholder model, aimed at long-term value creation for the wider community. Currently, the major obstacles to sustainable impact investing are short-termism and insufficient private efforts.
There is an increasing number of new enterprises aiming to improve social and environmental welfare that are being established and built but they require more sources of funding to grow. Impact investing as a growing asset class or as a core investment belief to precede Strategic Asset Allocation (SAA) plays a pivotal role contributing to unlocking the power of private capital to address societal issues.
Pension funds on the other hand, typically have a long term orientation in providing for the future needs of their beneficiaries. This is based on their core function of securing welfare obligations of governments to secure decent quality of life to those citizens no longer in the active work force. Even though sustainable investment strategies are discussed more in the institutional investment sector, the ultimate question is whether current activities are enough, or what would be the ways to increase sustainable long term thinking in the strategic asset allocation decisions of pension funds and other institutional institutions, which are still quite far from looking at the SDGs at the core of their SAA strategy, mostly focusing on short term risk and return optimization.
Based on the analysis of today's challenges of the modern economy and the need to secure long term sustainable growth and quality of life for the next generations, the main questions which arise, are the following: If the market bases its investment decisions and asset allocation on short term risk and return only, what is the impact on society at large? Are we creating a long-term sustainable economy, or are we investing in assets that compromise the social and environmental stability that is needed for a sustainable economy? Are we, by focusing on maximizing short term profits and minimizing risks, actually decreasing our own sustainability over the long-term?
Across the world, the appetite for impact investing is growing. Investors are eager to show that they are a force for good—that profit isn’t their only objective. Investors are no longer satisfied with compartmentalization either. They do not want to make money in one part of their life and do good in another. They want opportunities to make money while doing good. If the impact investing industry, in all its diversity, innovation and creativity, can respond to that basic demand from investors, then it can play its part in creating a world we will all want to live in.