Vienna, October 8, 2018 - Arnerich Massena, an Oregon-based registered, independent, employee-owned investment advisory firm that has been providing investment advisory and consulting services to endowments, foundations, private clients, charitable organizations, trusts and estates, and advises on corporate retirement and profit sharing plans since 1991, recently issued a new white paper on impact investing, titled “Impact Investing: Why?, What?, How?” (October 2018 Arnerich Massena, Inc., Contributors: Tony Arnerich; Jillian Perkins; Bryan Shipley, CFA, CAIA; Mitchell Vogt)
What Is Impact Investing?
In an attempt to define impact investing, the white paper divides the concept into two primary categories: Impact first, aimed primarily at generating social or environmental impacts. Here, investment return ranks second in consideration. In contrast, finance first prefers investments with market or better returns, while also generating a social or environmental impact.
The report sees impact investing not as a form of philanthropy, where financial benefit is traded for a societal or ecological good. Impact investing is seen as not even necessarily putting social and environmental impact above generating wealth. On the contrary – impact investing is seen as a way of reconciling benefiting society with benefiting oneself.
Why impact investing?
In an attempt of answering the question of why impact investing is a desirable alterantive to traditional investment forms, several factors come into play. First of all, demographics is a strong deciding factor. As the world population is rapidly expanding – the UN estimates that we will reach 9.7 billion by 2050 - demographic shifts generate an increasingly aging population in developed countries and a younger, working age population in developing countries. Large developing markets such as China and India have a growing middle-class with respective consumption needs. Basic needs such as water, food, healthcare, and infrastructure will expand, thus creating respective opportunities for businesses that provide them. Energy consumption will grow as well, while pressure is on to move away from fossil fuels and towards renewable energy sources. The unintended consequences of these demographic shifts include pollution, overcrowding, poverty, illness, and resource scarcity. Finding solutions for these problems will become the challenge of the future.
Another impact-driving factor is the increasing wealth inherited by the so-called millennials, who are at the same time exhibiting a preference for investments that reflect their values and social conscience. 75% of them consider social impact to be very important and 73 % believe investing should be about more than just financial gain.
Increasingly, the business world recognizes the need for incorporating sustainable practices and ESG factors into their investment portfolios. According to the UN Global Compact, 93% of CEOs consider sustainability key to success and an engine for innovation and growth. These companies become steadily more attractive for impact investors. Also, private business has entrepreneurship and innovation capabilities that are different from and can supplement those of governments, NGOs, and philanthropic organizations. They can contribute to solutions that are more effective and cost-efficient. The United Nations Sustainable Development Goals, incorporated in the Agenda 2030 requires funding that governments and philanthropy alone cannot provide.
How can investors invest for impact?
There are different ways in which potential investors can invest for impact. One way is simply by eliminating investment portfolios that are not in alignment with their values – coal or tobacco industry. Divestiture is the term for this kind of impact investing – a passive approach with a long history of use. In contrast, investing for social impact, which includes CSR (Corporate Social Responsibility) and ESG (Environmental, Social, and Governance) investments, as well as most of what can be termed sustainable investing, is an active approach where the investor chooses to invest in companies that promise to work for the social or environmental good.
Thematic investing is the next level up for investors who are also strongly profit-oriented. This form of investing is an approach that looks at trends to identify areas and themes of potential future growth and impact, and then concentrate on those areas. Another impact investing form, mission-based investing, focuses in on very specific issues or problems, often with a local or regional focus. The “mission” in mission-based investing can be nearly anything the investor feels strongly about.
Institutional impact investing is an important factor, aside from individual and private investing. Institutional investors are seeing impact investing increasingly as an attractive choice and this is a trend that is expected to grow. The huge capital provided by institutions will be critical in filling the gap to meet the United Nations impact goals, and governments have become aware of this and are already encouraging institutional investors to participate.
According to the U.S. Department of Labor, public pension funds and private retirement plans are increasingly incorporating ESG investments in their portfolios.
Importance of Impact Measurement
Coming up with universally accepted, standardized measuring tools for evaluating impact investments will be one of the greatest future challenges for the still relatively new impact investing market. Respective standards and tools for quantitative and qualitative evaluation are currently still in the process of being developed. A complicating factor in this respect is the different approaches to impact investing – they would each require specially tailored evaluation tools. For instance, a divestment approach would not fit the same measures as a thematic approach.
The strongest potential in developing a universally applicable evaluation metric lies in the UN Sustainable Development Goals (SDGs). Companies focused on making an impact in the world are likely to be working in one or more of the areas covered by the SDGs and could be evaluated according to whether their performance matches the particular SDGs and their sub-goals. This way, investors could count on more transparency with regard to what their investments accomplish in the way of social or ecological impact. Such reporting standards would enable investors to really connect with the companies that are making the biggest differences in the fields they have committed to.
To read the executive summary: http://arnerichmassena.com/pdf/pr/impact_exec_summary_Oct_2018_3.pdf
To read the white paper:
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