The COVID-19 outbreak has momentarily slowed down the fight against environmental and social crises. However, it has also exposed the flaws within our conventional production and consumption systems. The pandemic has awakened businesses, governments, and individuals to the dire consequences of solely pursuing capitalism and consumerism.
As the world looks beyond business-as-usual, the case for sustainable investments is stronger than ever. Capital flows into sustainable investing — be it ESG (environmental social & governance), SRI (Socially responsible investing), or impact investments — were already booming before the pandemic, totaling $30 trillion assets as of 2018 ¹. Impact investing, still in nascent stages in many parts of the world, is gaining ground. The Global Impact Investing Network (GIIN) defines impact investments as ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return’ ². In 2020, the impact investing market size stood at $715 billion ³.
While the impact investing sector has made significant strides, much of its transformative potential remains untapped. Why do impact investments matter for traditionally profit-driven investors? Below are three reasons why investors should embrace impact investing.
Governments and businesses are failing to meet international social or environmental agreements and commitments. Pre-COVID, fulfilling the UN Sustainable Development Goals — a set of 17 global goals collectively formulated by 193 countries — required an additional $5–7 trillion funding- per year ⁴. While the SDG fulfillment is already behind schedule by 62 years, the pandemic could delay advancement by another decade ⁵. With the 2019 greenhouse gas emissions 4% higher than the 2015 levels, the Paris Agreement is also in jeopardy ⁶.
Though not glaringly obvious, the compounding global calamities and inequalities in the backdrop of failed cooperative action pose a massive risk to the investment portfolios. For instance, the stranded asset risk arising from climate change and COVID-19 could cost large banks such as JPMorgan, Bank of America, and Citigroup zombie fossil fuel assets worth billions ⁷. Big Meat, including meat processing giants such as Tyson Foods, JBS, and Marfrig, drew the ire of more than 100 institutional investors with a combined $2.3 trillion assets under management for failing to provide decent work conditions and virus protection gear at meat factories ⁸. On the other hand, companies with flexible work policies were able to adapt to the crisis quickly. By taking an ESG or SDG lens, impact investors can take a holistic approach to risk mitigation and management.
2. Capitalize on opportunities
Using the SDG framework, impact investors can keep an eye on global megatrends such as climate change, hunger, and poverty and identify growth opportunities. With sustainability filtering into public consciousness, consumer appetite for sustainable and impactful products has grown. The success of purpose-led brands championing inclusivity and sustainability — whether it be inclusive beauty brand Fenty Beauty or plant-based meat company Beyond Meat — stands testament to the evolving preferences. For the private sector, the SDGs offer business opportunities worth $12 trillion in themes such as affordable housing, sustainable agriculture, and clean energy ⁹.
By helping impactful companies lower the cost of capital, impact investors could align their investments with values and earn market-rate or above-market-rate returns ¹⁰.
3. Drive a paradigm shift
Impact investing, with its focus on impact alongside returns, signals a paradigm shift in the financial landscape. As stewards of capital, impact investors hold the power to steer the world towards a smart, sustainable, and inclusive economy. In the public markets, impact investors can leverage their shareholder rights to hold large corporations accountable for their detrimental impact on the planet. In the private markets, impact investments can provide a springboard for innovation and sustainable growth by allocating money where it’s needed the most.
While the archaic concept of shareholder profit maximization makes way for stakeholder capitalism, impact investors will play a key role in making this transition a reality. As the world reaches a tipping point, impact investors will lead the way in driving systemic change that will lay the foundations for a new normal.
Originally published at https://eransandhaus.medium.com on July 6, 2021.
