In its 2022 “Sizing the Impact Investing Market” report, the Global Impact Investing Network (GIIN) estimated that over 3,349 organizations currently manage $1.164 trillion in impact investment assets under management (AUM) worldwide.
Arriving at this conclusion by evaluating the directly-invested impact AUM reported as of December 2021, this marks the first instance in which the organization's commonly-referenced estimation has exceeded the $1 trillion milestone.
With the deadline for achieving the United Nations’ Sustainable Development Goals (SDGs) approaching in 2030 the world has entered a significant phase of action, requiring serious commitments from asset owners and managers. There is a $4.2 trillion funding gap needed to attain the SDGs, and it is believed that only 1.1 percent of the total assets held by banks and institutional asset owners are required in order to do so.
“There is $2.5 trillion sitting on the sidelines, in bank accounts,” said Bill McGlashan, an investor and executive with over two decades of experience in impact investing. “It creates an imperative to do something with that. Let’s go out and have a positive societal impact. That’s capital that can be invested against great purpose and great ends. It’s the most scalable sustainable way to drive change that can happen in a time frame that matters to all of us.”
McGlashan is known as one of the leading advocates for driving impact investing into new frontiers. He has identified capitalism as the crucial factor for expanding economic prosperity, and has sought to utilize capital and investment discipline to make profitable investments while also fostering societal and environmental improvements. Through his career in private equity he has founded and led several investment funds including the TPG Growth Fund and The Rise Fund. The latter was started in collaboration with Bono and Jeff Skoll, and is recognized as the largest impact fund ever raised.
A survey conducted by Markstein found that 70 percent of consumers wanted to know what the brands they support are doing to address social and environmental issues, and 61 percent of young emerging leaders saying that business models should only be pursued if they achieve profitable growth while also improving societal outcomes according to a survey by Accenture and the World Economic Forum.
Investors are increasingly recognizing that the health and longevity of a business is inextricably tied to that of the world at large. Below, Bill McGlashan helps bring some clarity about impact investing, as well as other related concepts such as ESG factors and SDG goals.
Impact investing is an investment approach that seeks to produce positive social or environmental outcomes in addition to financial returns. There are various types of impact investments available across asset classes, each with their own set of potential results, but overall the primary objective of impact investing is to channel funds and investment capital toward generating favorable social results.
“We think we can take this beast called capitalism and help to direct it in a way that is productive. It has to be all of us coming together, and it has to be done in a way that’s scalable and sustainable,” said McGlashan.
Investors who adopt impact investing as a strategy evaluate a company's dedication to noblesse oblige – whether they seek to contribute positively to society as a whole – before engaging with that company. The nature of the impact that can arise from impact investing varies depending on the sector and the particular company within it, but some typical examples involve contributing to the community by supporting the disadvantaged or investing in sustainable energy practices to promote environmental conservation.
Environmental, social, and governance (ESG) refers to investment methodologies that embrace these factors as a means of helping to identify companies with superior business models. ESG factors offer asset managers added insight into the quality of a company’s management, culture, risk profile and other characteristics, by looking at non-financial information to identify potential risks and rewards.
Growing evidence suggests that integrating ESG factors into investment analysis and portfolio construction may offer investors potential prolonged performance advantages, and business leaders have taken notice. More than one in four S&P 500 companies that conducted earnings calls for Q4 2020 cited “ESG”, a 63 percent increase in ESG mentions from the previous quarter, and the highest number of ESG mentions in the last ten years according to an analysis conducted by FactSet.
Impact investing is often associated with ESG as socially responsible business practices gain increased attention in the business world, but they refer to distinct practices. Although ESG considerations reflect a degree of social consciousness, the primary goal of ESG assessment is to improve financial performance. This means that any analysis using ESG is still done through the lens of business decisions that will ultimately affect the returns of a company.
In contrast, impact investing involves the pursuit of investments that prioritize a particular objective beyond financial gain. Such investments may involve areas such as clean energy, education, or microfinance.
While the primary goal of ESG assessment is to improve financial performance, they are still a useful tool when it comes to choosing investments for an impact portfolio and many independent research firms use ESG scores to help grade investments along an ethical curve. For example, an impact portfolio centered on the environment could seek investments that attain a high ESG rating for environmental criteria.
The United Nations' Sustainable Development Goals (SDGs) are a universal appeal to eradicate poverty, preserve the planet, and guarantee peace and prosperity for all individuals by 2030. Adopted in September of 2015, the SDGs are 17 actionable and interdependent goals that encompass the most fundamental challenges we face as a society. According to McGlashan’s The Rise Fund, “the UN SDGs provide a concrete, globally-endorsed framework for promoting social benefit, economic inclusion, and environmental sustainability.”
How is impact investing connected to the SDGs?
When looking at the SDGs, there are categories such as reducing poverty, increasing gender equality, providing access to clean and affordable energy, and creating more sustainable cities and communities. Every goal has targets that require some sort of financial investment, and in order for these goals to be met by 2030, the responsibility cannot be placed on governments alone, or the individuals who live there.
“What’s so magical about the scalability and durability of the innovation engine of capitalism is that if you direct this engine around creating impact, my suspicion is we can create meaningful impact quickly,” said McGlashan.
Businesses must also play a major role, and they stand to gain a lot from doing so. The challenges that the world is facing globally also affect businesses and limit their potential to grow, such as scarce natural resources, weak financial markets, limited local buying power and lack of qualified talent. By putting the SDGs at the heart of their strategies, business leaders can drive growth, address risk and attract capital.
Impact investment plays a pivotal contributing role, as it has unlocked private capital to address societal issues. As people like Bill McGlashan push to channel capital toward solving global problems, impact investing will continue to gain traction and have a bigger impact.
“Our view is that [returns and impact] are absolutely co-linear, and we have been able to convince these large capital sources that they are co-linear,” said McGlashan. If the output of a business is that which creates impact, by definition the more successful you are, the more impact you deliver.”