In short, impact investing is simply making an investment with the intention of making a positive social and environmental impact while still making a financial return.
According to the Global Impact Investing Network (GIIN), there are three other key characteristics: 1) Impact investing is based on evidence and impact data; 2) the performance of the impact is managed; and 3) it contributes to the overall growth of impact investing. All while making a market rate financial return.
The John D. Gerhart Center for Philanthropy, Civic Engagement and Responsible Business of the AUC School of Business recently invited Margot Brandenburg to give a webinar and answer questions on the topic of impact investing and inclusive capital markets.
Brandenburg is the senior program officer at the Ford Foundation’s Mission Investments team, which is dedicated to building and strengthening the infrastructure of the impact investment market – with a focus on reshaping broader capital markets. For the last 20 years, she has worked on the intersection of philanthropy, capital markets, and social and environmental justice.
The Ford Foundation is the largest social justice foundation in the world and has been working on a number of social justice issues for 80 years. The Mission Investments team focuses on making grants and investments focused on impact investing and sustainable capitalism , so far are valued at $1.35 billion, which Brandenburg importantly noted was “a drop in the ocean of the capital market”.
Their investments focus on a number of social problems around the world including affordable housing and quality jobs in the United States, and healthcare and financial inclusion in the Global South.
The term “impact investing” was coined in 2010 and at the time, Brandenburg worked on a research report with J.P. Morgan and the GIIN and estimated that the size of the impact investing industry globally would grow to between $400 billion and $1 trillion by 2020.
“The reaction we got was largely that this was laughably ambitious. No one had ever heard of impact investing and we were saying it could be as big as a trillion dollars within a decade,” she said. “As it turns out, the term caught on faster and more broadly than we could’ve expected.”
The GIIN’s annual survey of impact investing activity found that in 2020 there were $715 billion worth of assets acquired through impact investing. However, Brandenburg noted that it was important to compare that to global capital markets which were valued at above $120 trillion.
“We at Ford realized the way we practice capitalism more broadly is either a headwind or a tailwind for everything we care about, meaning it can either accelerate or impede all of the other goals that we have.”
They started to not only try to grow impact investing but also “achieve a more inclusive and sustainable form of capitalism.”
What continues to give hope, Brandenburg said, has been the growth of what is called “sustainable investing” which in 2020 was estimated to be valued at over $30 trillion. Future projections predict sustainable investing will represent a third of global assets within the next couple of years.
Sustainable investing is “potentially positioned as a bridge between this dedicated intentionality to have impact and the rest of the capital markets which is generally agnostic or even hostile to the shared prosperity that we want to see.”
Where impact investing has a solid intentional goal that seeks to make a financial return, sustainable investing is more passive in that it focuses more on avoiding negative impacts such as not investing in tobacco or fossil fuels.
Impact investing is still different from philanthropy in that the latter unconditionally gives grants away without expecting any return.
Brandenburg revealed that the last decade has seen year-on-year growth in impact investing and responsible and sustainable finance. She further revealed that interestingly, impact investing accelerated during the COVID-19 pandemic.
The racial justice uprisings around the world in 2020 and growing awareness of the climate crisis translated to an uptick in impact investing.
The European Union (EU) is set to issue rigorous requirements obligating small and large companies to disclose details about their performances in non-financial activities.
The International Financial Reporting Standards (IFRS), which is an accounting standard used in 140 countries, announced at the end of 2020 the creation of a sustainability standards board which will measure a number of social and environmental performance metrics that will sit alongside financial accounting metrics.
Younger generations are also bringing different attitudes and expectations of capital where they are more conscious of the impacts of their investments and businesses. Additionally, philanthropists are increasingly gravitating towards investing as opposed to charitable giving.
Impact investing is only set to continue growing as more socially and environmentally conscious generations become more dominant in capital markets and in decision-making positions around the world.
Capitalism is being reshaped in a way to tackle the climate crisis, gender and racial inequality, and poverty, where it was once a cause of these issues.