3. The Economic Viability of Impact Investing
A recent research collaboration of asset managers and academics on sustainability in investment concluded that, “Portfolios and strategies we judge as well-suited to present-day conditions will prove unsuited to future conditions. We argue that investors, who previously have been able to ignore [ESG factors] or react to changing conditions by making a series of small changes to their strategy, run a significant risk that their performance will not be sustainable into the future.”17 Such statements are indicative of the growing recognition of a need for new ways of thinking and of incorporating non-financial considerations in investment decisions among mainstream investors. Yet, many investors remain on the fence and want to see a definitive case for impact investing. What would such a case look like?
Currently there is a shortage of robust datasets, risk/return models and benchmarks for impact investments that would enable analyses to compare performance among impact investments or to compare traditional investments to impact investments – a point often cited by mainstream investors as a challenge to engagement. However, while developing such analyses will be necessary as impact investing matures, we believe that framing the case for impact investing based on returns and track records does not capture important additional dimensions which are worthwhile to consider. Furthermore, evaluating the viability of impact investing as a whole will likely remain a daunting task as would, for example, evaluating the entire set of actively managed mutual funds – such funds focus on different asset classes, employ different strategies and there are over-and under-performers in any cohort.
Therefore, this section focuses on the long-term viability and the case for impact investing on three dimensions. The first considers lessons from the evolution of ESG, the second evaluates a set of compelling global economic and demographic trends and the third provides select spotlights on support from the public sector.