Solving the world’s biggest social and environmental challenges is going to cost money. Lots of money (as I wrote in my last blog, just achieving SDG 1 is likely to cost $1.4trn a year). So it’s vital that we find new ways of drawing in private capital to supplement the efforts of governments and philanthropy. Over $100trn is currently invested in private wealth accounts globally, mostly without consideration of social and environmental impact. Imagine if we could deploy a sizeable chunk of this capital to support investments that make our world a better place?
The good news is that there are a growing number of private investors who want to do this, either because they want to better align their investments with their values, or because they think it makes financial sense – as a way to find growth in mature markets, or to diversify their portfolio.
Values-driven investing is not, in itself, a new phenomenon. It’s been around for centuries in different forms, notably with the Quakers and other religious groups. More recently, the 1980s saw the birth of the Socially Responsible Investment movement (SRI), which led to ethically-minded investors screening out so-called ‘sin stocks’ or goods from countries with questionable political regimes (e.g. during South Africa’s apartheid period). And since the turn of the century, support has been growing for responsible or ESG investing. The institutions that have signed up to the UN Principles of Responsible Investment have a combined AUM of over $70trn; while according to a recent survey by Morgan Stanley, 70% of asset owners globally have already implemented ESG strategies.]
In other words, it has become increasingly clear that investors do not have a binary choice between investment and philanthropy. In fact, as a 2014 paper produced by the G8 Social Impact Investment Taskforce showed, there’s now a ‘Spectrum of Capital’, with financially-driven investment at one end, pure philanthropy at the other, and a number of approaches sitting somewhere between the two – including investors who negatively screen for ESG factors, those who seek out ESG opportunities, and those who actively set out to address societal challenges.
This last category is, broadly speaking, what we mean by impact investment. And it’s growing fast. According to a recent Global Impact Investing Network survey, investors committed more than $35 billion to impact investment deals in 2017, a 58% increase on the previous year; while total impact assets of its respondents were $228 billion, double the 2016 total.
Part of this growth is driven by the changing profile of wealth holders, a function of broader demographic trends. Globally, we’re starting to see a huge transfer of wealth to women and millennials. According to the Boston Consulting Group, women are likely to hold $72trn of private wealth by 2020; that’s about a third of the global total, and more than twice as much as they held in 2010. Similarly, UBS reckons that $7trn globally will pass into the hands of millennials between 2017 and 2020.