The premise of impact investing is simple: Investors deploy capital in ways that return a profit, and simultaneously make the world a healthier place. Put that way, it’s hard to see why impact investing isn’t part of everyone’s portfolio.
But it’s not, and NN Investment Partners’ recent survey of 290 professional investors from several European countries reveals why. The survey found that nearly half, or 46%, of these investors would hesitate to dive into impact investing because they are concerned that “the range of investment opportunities that exist are not sufficient for RI (responsible investing) to become a mainstream proposition.”
Analyst Michael O’Leary, a founding member of Bain Capital’s impact investing fund Double Impact, now writing a book on impact investing, says that the concern about range is widespread. And, he said, it’s misguided: “Impact investing is hamstrung by the idea that only certain companies should count.”
This raises the question — which ones should count?
The nonprofit B Lab designates some for-profit entities (over 10,000 thus far) as “B Corps,” companies that promise to “balance purpose and profit.” These organizations are legally obligated to consider the impact of their decisions on their “workers, customers, suppliers, community and the environment.”
O’Leary says that an investor can have more impact “transforming a traditional company into a B Corp than feeding yet another round of funding to a B Corp that’s already well loved.” The pool of potential impact investments is, then, as big as the pool of investments in general, because, in O’Leary’s words, “Every investment in the world should be made in a responsible manner.”
‘Risk Management Implications’
But investors also need to be convinced that impact investing offers a favorable risk-reward ratio. Fully half the NN Investment Partners survey respondents are skeptical of letting ethical concerns affect their investment decisions because they fear that “responsible investing can have risk management implications.”
Here, again, O’Leary says that this widespread concern is overblown: “Impact investing should outperform over the long-term because it’s got a better theory of risk,” he said.
Risk management is not just a point, it’s the point, he says.
“Climate change is a risk. Inequality is a risk. Risk isn’t about stock price volatility or correlation between asset classes. It’s about building companies that will be serving all their stakeholders in a hundred years,” O’Leary said.
There are signs that investor attitudes are changing.
Signatories to the U.N. supported Principles for Responsible Investment rose 20% year over year, according to its 2019 annual report. Signatories pledge to invest with an eye to environmental, social and corporate governance (ESG) factors. In its year-earlier report, for 2018, it said signatories managed $89.7 trillion; a similar number isn’t available in the 2019 report.
The PRI is not the only impact-oriented statement garnering copious signatures. In August, nearly 200 CEO’s – including Brian Moynihan of Bank of America, Tim Cook of Apple, Jeff Bezos of Amazon, Mary Barra of General Motors and Larry Fink of BlackRock – gathered for a “Business Roundtable” to discuss the responsibilities of 21st century corporations. They issued a statement arguing that corporations should not seek only to maximize shareholder profits, but also to remember the needs of employees, environment and suppliers.