In the first months of his administration, President Donald Trump has taken steps to reduce federal spending for environmental protection, alternative energy, climate-related science, refugee assistance, humanitarian foreign aid, domestic healthcare and social services programs. If Trump has his way with his slash-and-burn blueprint, which is anything but certain at this point, the US would be reverting to a version of capitalism that recalls 19th century when billionaire industrialists like John D. Rockefeller and Andrew Carnegie sought to maximize corporate profits without regard for social costs.
The hard-knuckle Trump doctrine has reverberated around the world, from the U.S. and Canada, to Europe, Latin America and Asia, leaving government and business leaders deeply concerned about how these draconian policies might impact global efforts to fight climate change, contain epidemics and tackle the myriad problems associated with poverty and underdevelopment.
Despite the apparent revival of the notion that capitalism is merely the survival of the fittest, however, there is ample evidence to suggest that investors and fund managers are adopting a more nuanced understanding of what constitutes a desirable return on investment. In fact, there are good reasons to believe that now is the time to consider an impact investing strategy, putting private capital to work in sectors like alternative energy, healthcare and housing that are facing potential U.S. budget pullbacks.
Making an impact
Impact investments are intended to generate social and environmental impact in addition to a financial return. The Global Impact Investing Network (GIIN) points to three other core characteristics of impact investing:
Intentionality. An investor intends to have a positive social or environmental impact through investments. For instance, Norway’s $900 billion sovereign wealth fund – the largest in the world – is currently considering excluding investments in several oil, cement and steel companies for violating the fund’s carbon emissions criteria.
Range of asset classes. Impact investments can be made in both emerging and developed markets across asset classes, including fixed income, venture capital and private equity.
Impact measurement. A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability.
In addition to generating positive financial, social and environmental returns, impact investing can also be viewed as an instrument to persuade businesses to adopt more socially and environmentally responsible attitudes. Not surprisingly, the stock values of the global oil firm BP, Brazilian mining giant Vale and Australia’s BHP Billiton were severely impacted as a result of the 2010 accident with the Deepwater Horizon offshore rig in the Gulf of Mexico and the 2015 breach of the Samarco Fundão dam in Brazil. Under pressure from concerned investors, these companies were quickly forced to implement energetic and comprehensive programs to compensate the affected populations and reverse the environmental damage.
A dynamic sector
In the past three years, leading asset managers such as BlackRock, Bain Capital, Bank of America’s Merrill Lynch and Goldman Sachs, to name just a few, have entered the impact investment sector, channeling capital into companies with social and environmental goals. Speakers from Goldman Sachs, Hermes Investment Management, KPMG and other companies took part in the recent Impact Investing World Forum in London – another sign of the growing interest in this field.
In addition, a growing number of fund managers in North America and Europe are actively seeking out impact investment opportunities. One example is Switzerland’s BlueOrchard, a leading global impact investment manager focusing on microfinance, education and climate while providing attractive returns for investors. To date, BlueOrchard has invested US$3.5 billion in 350 institutions across 70 countries, providing access to financial and related services to over 30 million low-income individuals.
However, impact investing is still only a small market when compared, for instance, to the global equity market, estimated at US$61 trillion (market capitalization of domestic listed companies) by the World Bank in 2015. In contrast, about US$15.2 billion was committed to 7,551 impact investment projects that year, according to GIIN’s 2016 Annual Impact Investor Survey. The largest sectors by asset allocation were housing, microfinance and energy. For 2016, the respondents’ answers indicated that the planned expansion of their impact investment portfolios would be in the vicinity of 16 percent, reaching nearly US$18 billion.
Room for growth
While some fund managers in the U.S., Europe and Latin America have already embraced impact investing, many others are not yet ready to look beyond income statements and balance sheets to see if the company’s goals, values and mission address health, social and environmental challenges.
Impact investments typically require an additional layer of due diligence, digging into the company’s culture to determine its commitment to the values and principles of socially responsible investment or “conscious capitalism,” and the impact on stakeholders both inside and outside the organization.
Greater awareness of the opportunities to make a positive social impact, while potentially achieving market-rate returns will help “pull” fund managers in this direction in 2017. In addition, individual investors, family offices, endowment funds and other sources of private capital are “pushing” their managers to seek out promising impact investment opportunities.
That trend is likely to accelerate as fund managers and their clients respond to the pullback in U.S. government funding for health, social and environmental issues. The private sector can help fill these gaps, bringing new products and services to market that deliver both financial and social returns.
Finally, impact investing is essential for the long-term sustainability of our world. As UN Secretary General António Guterres said in the UN Environment Annual Report 2016, helping countries to mitigate and adapt to climate change, can lower the risk of floods, droughts, famine and instability. “And by promoting a shift to a green economy, we can create jobs, spur inclusive economic growth and make societies more resilient. These are all critical to sustainable development and a peaceful future.”
Brazilian-born Ed Morata is partner and co-founder of Eneas Alternative Investments, a private equity firm based in Madrid, and President of Lug Healthcare Technology. He has over 30 years’ experience in international corporate banking and asset management in Latin America, Asia, Europe and the U.S. He currently resides in Boston, MA.