Investing for Impact: Urgent and Inevitable
Words by Daniel Simons
The daunting challenges of our future, and stubborn inaction from our elected leaders could tempt even the most bright-eyed optimist to spiral into full doomer-ostrich mode. Climate change, biodiversity loss, food insecurity, economic turmoil and military conflicts all seem to be leading inexorably to a crescendo of chaos in the not-too-distant future. But if you feel like we are living out the real-life version of ‘Don’t Look Up’ and nothing is being done about the peril we face, you’re not looking in the right places.
As the multiple crises converge and threaten the foundations of our civilization, a tsunami of change is rising up across all sectors of society. Barring total economic revolution, and setting aside the fact that we can’t have infinite growth on a finite planet, some of the strongest levers we have for change will come from the market and conscious commerce. One of the most powerful and profound ways we can shape the future is by choosing how we invest our money.
In response to the escalating threats we face, the economy as we know it has already been given a facelift. Conscious capitalism has risen, corporations are embracing environmental, social and governance considerations and we’ve seen the rise of benefit corporations and social enterprises. Businesses are aligning with the Sustainable Development Goals and making net-zero, or nature positive, pledges and consumers are demanding change and holding businesses accountable.
Ann Lappe said, ‘Every time you spend money, you’re casting a vote for the kind of world you want.’ From bamboo toilet paper, to charity water, to ethical fashion and fair trade, ‘conscious consumption’ has been nudging the world in the right direction. But if we really want to create change, impact investing is where we’re going to get the biggest bang for our buck.
Speaking of bucks, Buckminster Fuller said ‘You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.’ Impact investing is one of the greatest tools we have to supercharge and scale up the breakthrough and disruptive innovations we need to usher in the new world. The good news is that impact investing is here, it's proven, it’s profitable and there are more ways to participate than ever before.
Impact investing is not new, but the term for it first came to prominence in 2007. The Global Impact Investment Network (GIIN), the world's leading authority on impact investing, defines impact investing as ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.’ Unlike SRI (Socially Responsible Investing), which involves writing up a big ‘no-no’ list, and ESG investing (Environmental, Social and Governance), which incorporates positive and negative factors and risks into decision making, impact investing goes beyond the ‘do-no-harm’ philosophy and actively tries to create positive change.
Impact investing is often informed by intellectual frameworks like the United Nations Sustainable Development Goals (SDGs), Paul Hawken’s Project Drawdown or Regeneration, or Kate Raworth’s Doughnut Economics, and can encompass industries like sustainable agriculture, renewable energy, conservation, microfinance, affordable housing, healthcare, education and circular economy. Some impact investors seek at or above market returns on their investments, others are ‘impact-first’ and don’t mind getting a haircut if it means creating extra impact.
Why is impact investing both urgent and inevitable? According to the IPCC reports, the world needs to invest about $2.3 trillion every year until 2035 into the energy system (about 2.5 percent of world GDP) to have a chance of limiting warming to 1.5 degrees. The UN suggests we need to move $2.5 trillion to meet the SDG’s by 2030. Another study from the International Renewable Energy Agency found that to adequately combat climate change, 131 trillion needs to be invested by 2050 – or 4.4 trillion on average every year. We need a gut-churningly radical transformation across all sectors of society if we want to hold on to civilisation as we know it.
It’s an enormous amount of money, but it's nowhere near out of reach. For context, the global military spend in 2020 was just under $2 trillion. The world’s total investments have been estimated to be around $300 trillion – so a mere 1 per cent shift in the global capital markets towards impact investing could get us to where we need to go. The take home message – there’s going to be a mind-bending amount of investments in researching, innovating and scaling up the solutions to our global challenges over the coming decade.
While the allure of being on the right side of history should be enough to motivate everyone, the risks of being left behind by the new world are equally compelling. As Bill Mckibben, one of the world’s leading environmentalists pointed out in his ‘Do The Math’ article in Rolling Stone, the amount of assets on the balance sheets of the world’s largest fossil fuel emitters is already ludicrously larger than our global carbon budget allows. If we want to keep below 2 degrees of warming, then many of the assets on the books of these behemoths needs to stay in the ground. That basically means we have the choice between stranded assets and the (hopefully) managed deflation of our carbon bubble...or being cooked.
Nobody wants to be cooked, especially people who might be hanging around for a while. That’s why Millennials to Gen Z’s are the most socially and environmentally conscious investors ever. With Boomers passing on the baton to the next generations, the greatest transfer of wealth the world has ever experienced is about to supercharge the next economy.
Luckily, choosing between investing for impact and investing for profit isn't the dilemma it may once have been. With the scale of the crises we face and the gargantuan opportunity presented by the transition, it’s no surprise that ethical investments are proving themselves to be as, or more, profitable than their counterparts. For example, The Deloitte Australia Clean Tech index (DACT) which tracks over 80 of Australia's publicly listed clean-tech stocks has shown that clean-tech has outperformed the market for almost a decade. The 5 year gain for the DACT was over 73%, compared to the 23% gain for the ASX200. Research from The Responsible Investment Benchmark Report in 2021 showed that funds available to Australians with a ‘responsible lens’ returned 7.2% compared to the national average of 2.9%.
After another report showing how climate impacts are occurring faster and with greater devastation than predicted, the U.N Secretary-General, Antonio Guterres lambasted world leaders for their ‘litany of broken climate promises’ and slammed the governments and those corporations who put the power and influence of fossil fuels above the welfare of the planet. But while world governments have been architecting inadequate targets and pledges, many businesses around the world are waking up to the realities of the tasks at hand.
"Every time you spend money, you’re casting a vote for the kind of world you want."
The team from Birchal, one of the most successful equity crowdfunding platforms.
"This tectonic shift in the way business is being done will transform the impact investing ecosystem and lead to increasing opportunities for impact investors to catalyse epic change and see real returns."
All across the globe organisations are being created to accelerate the transition to a post-carbon world, philanthropists are announcing impact venture funds and large corporations are investing in solutions that will help them move towards net-zero or carbon positive organisations. Even not-for-profits are embracing venture models. For example WWF are adopting new ways to use impact investing to catalyse change and usher in a regenerative future. They've partnered with filmmaker Damon Gameau's Regen Studios to create a film and impact campaign called 'Innovate to Regenerate' where they will be investing in community-led projects across Australia.
Over 2000 corporations have joined the United Nations Global Compact’s ‘Science-Based Targets Initiative, which shows organisations how much and how quickly they need to reduce their greenhouse gas emissions to prevent the worst effects of climate change and RE100 is uniting the world’s most influential businesses to commit to 100 percent renewable electricity. In Australia, the Investor Group On Climate Change (IGCC), which represents institutional investors from Australia and New Zealand with over 2 trillion under management is on a mission to usher in a climate-resilient, net-zero emissions economy by 2050. This tectonic shift in the way business is being done will transform the impact investing ecosystem and lead to increasing opportunities for impact investors to catalyse epic change and see real returns.
With the escalation of the multiple crises facing our species and the radical transformation of the global economy in response, the uptake of impact investing will only accelerate. Already philanthropists and family offices are allocating more of their core funds to impact investing, global giants like Black Rock and Bain Capital are growing their billion-dollar impact offerings, charities are embracing venture funding and celebrity billionaires like Mike Cannon-Brookes are supporting epic projects like the 30 billion dollar Sun Cable that will send solar energy from Australia to Singapore. Everyone is divesting from the old world, and investing in the new.
Impact investing is needed to meet the enormous challenges we face. It’s empowering, it's catalytic, it's profitable, and it's open to everyone. The only question is, where to start?