Impact Investing in the Post-Globalization World: A View from the Trenches
“What screws us up the most in life is the picture in our heads of what it’s supposed to be.”
―?Socrates (470 – 399 BC)
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In the emerging post-globalization world, what is the potential of impact investing? Sure, entrepreneurship and international markets continue to matter – but they are impacted by growing industry concentration, the accelerating climate crisis, growing inequality and post-truth politics. How do we factor this into impact investing strategies, and what does it mean for the impact investing movement at large?
For starters, we would expect a young movement such as impact investing to be able to adapt to changing circumstances and surmount new obstacles. Coined in 2007, the notion of “impact investing,” or investing that systematically targets social and environmental returns alongside financial returns, has swiftly moved from being a fringe idea to becoming a mainstream concept in the financial industry.
In doing so, impact investing had to overcome a number of obstacles over the past fifteen years, just like any other innovation that is diffused successfully. To ground a forward view, it is instructive to first look at how.
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Defining an investment concept
The initial challenge was conceptual: given that ideas about linking up the investment of capital for personal gain with social objectives had been around for centuries, how could the concept be formalized to ground a new community of investment practice? This without being so restrictive that this would stifle innovation?
The solution: production of a number of seminal studies such as “Investing for Social and Environmental Impact” published by the Monitor Institute in 2009, to create a concept and vision of what impact investing actually was, and what it could achieve. Underpinning the realm of ideas, the establishment of an industry body that produces applied research, industry advocacy tools and investment and impact guidance, the Global Impact Investing Network (GIIN), also in 2009. The GIIN grew from humble beginnings at two conferences at the Rockefeller Foundation estate in Bellagio, Italy, in 2007 and 2008 to a network of over 20,000 “investors and leaders” in 2022.[1]
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Defining social impact
A key part of this initial challenge was to define what would differentiate impact investing from other approaches to investing, and why this mattered.
Integrating a societal agenda into an investment agenda was not per se a new phenomenon. Take for example the Methodist movement. Its members initially advocated for reform within the Church of England, and later founded a free church and Methodist societies throughout the British Empire. In the eighteenth century, the Methodists already came out against investing in businesses related to conspicuous consumption, the slave trade, or smuggling. And they were against investments in liquor and tobacco manufacturers, or gambling.
The societal and market context then was completely different from today. In the early twenty-first century, capital markets had reached a state of development that the Methodist investor of the day would have been hard pressed to imagine. Today, the information revolution allows for data gathering and processing that cranks out information that rating agencies such as Moody’s Investor Services, Standard and Poor’s (S&P), and Fitch Group, or Morningstar investment rankings routinely use to manufacture capital market information for investors.
To give the impact investment market a form, this approach was applied to tracking the social and environmental outcomes associated with a specific impact investing strategy. The creation of the Global Impact Investing Rating System (GIIRS) in 2011 as a “comprehensive and transparent system for assessing the social and environmental impact of developed and emerging market companies and funds with a ratings and analytics approach” is a good example of doing just that.[2] A host of other impact measurement and rating methodologies have sprung up since.
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Gaining critical mass
The road was now free: a clear concept and impact measurement methodologies had been necessary to enable the emergence of an impact investing market.
To make all this real requires investment capital on a massive scale. In an impressively short amount of time, impact investing surmounted this obstacle as well. In 2009, the Monitor report mentioned earlier forecast that the impact investment market would grow to an asset base between USD 400 billion and USD 1 trillion over the next ten years.[3]
Impact investments crossed the threshold for the first time in 2022: the GIIN was estimating that the market had now grown to USD 1.164 trillion.[4] The long period of benign capital market conditions lent a helping hand. Following the financial crisis in 2008, the 2010s turned out to be the longest bull market in history.[5] A depressed base, plus expansionary monetary and fiscal policy paired with the absence of major world crises translated into a decade of incremental capital market growth with low volatility.[6] ?To capture this in a single graph, the progress of the MSCI All Country World IMI Index provides a good illustration (see hyperlink, MSCI All Country World IMI Index, January 2010–December 2019[7] )
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The "impact stampede" and the "reflexivity challenge"
The combined result of the establishment of an elegant investment concept and an empirical approach to social impact measurement could have been the emergence of a small group of investors and investment professionals committed to impact investing.
Extremely favorable macro conditions helped turn this into an “impact stampede” – the emergence of an impact investment movement. Who would not want to do good and do well at the same time? A proposition particularly attractive to next gen investors and professionals who would anyway want to redefine the rules of the game to allow for professional identities that suited their generation and were compatible with their values.
A sign of success, this also created new challenges. Unlike particles who do not modify their behavior when a physicist conducts experiments, observes a new particle and publishes findings in an article – as happened recently in the Large Hadron Collider (LHC) at CERN in Geneva, where researchers found a total of 59 new particles in 2021 – human beings do modify their behavior and social organization as a result of powerful ideas and new information.[8] Just think about the consequences of the world religions’ scriptures, or Karl Marx’s “Das Kapital.”
This also applies to impact investing. On the one hand, practitioners often forget that the concepts they work with are useful social constructions that may have to be adjusted when framework conditions change. On the other hand, others outside the hard core of the community selectively onboard impact investment concepts and labels, without however sufficiently adjusting their underlying investment practice to be coherent.
This dynamic makes it hard for market regulators to keep up with and establish optimal frameworks governing impact investing markets. It is also what powers the “ESG backlash” that the CEO of the GIIN, Amit Bouri, expects in the years ahead.[9] But we can nevertheless expect more adoption of various levels of impact investment thinking in the financial industry in the years to come, and on balance, that’s a good thing.
If we take a meta level, comparative perspective – factoring in the findings of decades of innovation research – in “historical time,” such processes are simply a part of any diffusion process. In “biographical time,” the battles over what is the right approach are being energetically and sometimes bitterly fought over by different sets of players. For them, specific viewpoints are core to their worldview and identity. But once the road from ARPAnet’s first node-to-node communication from one computer to another in California in 1969 to today’s world is traveled, where fifty years later, over sixty percent of the global population use the Internet, and 4.7 billion (or 59 percent) use social media, many of these details no longer matter that much.[10] ?
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New obstacles to long-run relevance
Nevertheless, impact investing needs to offer relevant answers to the problems at hand.
Until the COVID-19 pandemic, this was smooth sailing. In the past three years, the global outlook has changed in fundamental ways. Interventionist government is back; seen that global society had to deal with a once-in-a-century Spanish flu equivalent, this was not all bad. A by-product of the crisis, spiraling fiscal deficits and interest rate hikes to curb inflation are also taking a toll on private markets, the home turf of impact investing.
Shakeups can help drive long-term innovation and competitiveness. What one analyst argues regarding?venture capital is also valid for impact ventures, “There are two types of companies that need to be careful: ones that are all tech and no revenue, or all revenue but no tech […] You have to be solving real problems for real people.”[11] In this view, industries such as blockchain, crypto, climate tech and cybersecurity –?“’the Energizer bunny’ of fundraising’” – will all continue to galvanize investor interest.[12]
On public markets, the rise of passive investing has moreover contributed to concentration in the asset management industry, with the associated risk of a reduction of the very competition which is the source of innovation and prosperity. One does not have to be quite as alarmist as Sanford Bernstein in his 2016 paper “The Silent Road to Serfdom: Why Passive Investing is Worse than Marxism,”[13] but we better worry about the unintended consequences of overconcentration.
For the impact investment community, this means that going forward, next to solid company level analysis and an understanding of markets, factoring in the macro view will become increasingly core to both economic and impact value creation.
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Developing a forward view on opportunity sourcing
Asking AI chatbot ChatGPT how to find impact investments offers a good summary of conventional wisdom on opportunity sourcing in impact investing:[14]
·??????“Impact investment funds and platforms: Look for impact investment funds or platforms that pool money from multiple investors to invest in companies or projects that have a positive social or environmental impact.
领英推荐
·??????Social impact bonds: Social impact bonds (SIBs) are a type of impact investment that is used to finance programs aimed at addressing social problems.
·??????Community development financial institutions (CDFIs): CDFIs are financial institutions that are specifically designed to provide capital to underserved communities.
·??????Crowdfunding: Crowdfunding platforms allow individuals to invest in companies or projects that align with their values and have a positive impact.
·??????Networking: Network with like-minded individuals and organizations to learn about new impact investment opportunities.
·??????Research: Research companies and projects that are making a positive impact in the areas you care about. Look for news articles, reports, and online resources that can help you find impact investment opportunities.”
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Conclusion: go further upstream, dig deeper
Diversity, equity, and inclusion issues will become increasingly central to the impact investing agenda.[15]
Yet what will ultimately shape the opportunity to allocate capital for financial return paired with a social and environmental impact is the ability to navigate the following four verticals.
First, technology. Let’s factor in that technology will rapidly reshape the opportunity space. Years ago, we upgraded textile factories in Bangladesh to improve the environmental footprint and working conditions. This is still important. But at some point, 3D printers will take over garment manufacturing and countries with a weak human capital and technology base will not be able to simply compete on the low cost of labor and lax environmental regulations.
Interesting new opportunities include investments in sectors such as education and healthcare. This where there is strong demand and willingness to pay for highly efficient, targeted business models that go beyond simply connecting or “uberizing” services – because high quality points of service to be connected to may not (yet) exist in sufficient numbers so that a digital only strategy that makes no investments in bricks and mortar is likely less viable, and at any rate less impactful.
Second, institutions and legitimacy. We need to factor in the changing nature of institutional arrangements around the world, and their implications for the viability and legitimacy of impact investments. The 2021 US Capitol attack and the 2023 Brazilian Congress attack offered dramatic illustrations of the effects of social polarization and institutional breakdown. More broadly, a post-factual paradigm and polarization are on the rise around the world, and this has implications for the stability of business environments. $
My recent visit to Peru, just before the beginning of the ongoing political crisis offers first-hand insight: As institutional arrangements around the world grow weaker, in many parts of the world, impact investors are thrown back to backing ventures that connect a country’s traditional comparative advantage with global markets – such as exporting super fruits or shrimp from Peru. Domestic markets are getting harder to enter and operate in, and capital-intensive investments in fixed assets become less viable.
Next to raising questions about the financial viability of investments, the question is also, was this the transformational impact aimed for at the outset? Geographer Alexander von Humboldt may have been right when he famously stated, “At no other time has Nature concentrated such a wealth of valuable nourishment into such a small space as in the cocoa bean” (which originally stems from Central America).[16] For impact investors aiming for transformational social impact alongside returns, agricultural exports are nevertheless only one piece of the puzzle.
Third, sector focus. As impact investing finds its footing in the post-Covid pandemic, post-globalization era, the macro environment may remain less stable and America an inflation nation. But the investments in climate related technologies and services will be enormous. Compared to mainstream investments in established industries and large-scale government programs, impact investing is capital light. Wherever there is a link to fundamental demand shifts in sectors such as climate, energy, aging, healthcare, migration, or education, there is opportunity for impact investors. This provided they back innovative propositions that offer new and better ways to deliver against negative environmental externalities or achieve social inclusion and equity objectives in ways that are financially viable.
Fourth, investment approach. Socially responsible investing gained momentum in the United States in the 1960s, when Vietnam War protestors demanded that university endowment funds stop investing in defense contractors. As the mainstreaming of impact investing powers on, it will benefit from social movements that challenge business as usual and ask for new ways to tool the economy. Traditional investment firms and venture capitalists will increasingly adopt an impact lens in their investments. Whenever their investment and fundraising competences can be applied to sourcing opportunities and deploying capital for impact, and the exercise is not just a marketing play, that’s a good thing.
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Maximilian Martin, Ph.D. is an impact investing veteran who wrote the primer “Status of the Social Impact Investing Market ” or the first ever G8 conference on impact investing hosted by the United Kingdom in 2013, and “Building the Impact Economy ,” a term he coined in 2010. Max is also a Senior Fellow at the elea Center for Social Innovation at IMD Business School.
He is currently working on a new book on the macro view of impact investing for investors and practitioners. If you wish to support the research, check back soon on Kickstarter for the project page and learn more.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of the organizations whom he serves in an executive or board of directors’ capacity.
Endnotes
[6] Despite constituting the longest bull market ever, the 2010s were only the fourth-best decade for stocks in the last seven bull markets, see Decade in Review: 2010s Was the Decade of the Bull (usnews.com)
[8] https://theconversation.com/cern-scientists-discover-four-new-particles-heres-why-they-matter-155800
[11] Are The Good Times Over? Startup Valuations Dip As Inflation, Geopolitical Issues And Pandemic Concerns Swirl (crunchbase.com)
[12] Ibid.
[14] Response to the question “how can I find impact investing opportunities,” asked using ChatGPT at OpenAI on January 30, 2023.