Wednesday, January 6, 2016

SRI and Impact Investing to Combat Climate Change

If 2014 was a good year for socially responsible investing (SRI), and impact investing, 2015 was even better. Last year we saw significant growth in this new wave of value embedded capitol allocation. The world is changing and a growing number of investors realize that responsible investing is a world changing financial opportunity.

Both SRI and impact investing refers to investing capital with the intention of producing social and environmental benefits alongside financial returns. Strategies include things like incorporating environmental, social and governance (ESG) factors into investment decision making.

Although SRI and impact investing share many features in common they are not synonymous. Impact investing measures and reports on social change while SRI incorporates things like ESG screening.

These forms of responsible investing allow organizations, companies and individuals with a social purpose to draw from the large pool of funding available from capital markets. The immense financial resources of the responsible investment community can contribute to environmental and social progress in a number of very significant ways. First and foremost they can help to rapidly scale up innovative solutions to many of the world's problems. What makes impact investing and SRI so powerful is their connection to public policy. This is all about partnerships that deliver shared value. To put it another way it is about deriving financial returns that have tangible benefits for people and communities.

The size and scope of these opportunities have come into focus in 2015 particularly as it relates to climate change. In the wake of the COP21 climate deal, almost 200 governments are expected to invest $16.5 trillion over the next 15 years in low carbon technologies. Governments are looking to the private sector to help with some of this funding. The merits of investing in efforts to combat climate change are backed by the risks associated with business as usual. As reported by the Guardian, an Economist Intelligence Unit (EIU) report warns that between 4.2 and 7 trillion dollars worth of investment are at risk from climate change.

As reported by Triple Pundit in 2014 the Aspen Network of Development Entrepreneurs (ANDE) estimated that there are 199 impact investing funds. J.P. Morgan estimated that global impact investments exceeded $50 billion in 2010 and predicted that invested capital in the impact investing market could reach $400 billion to $1 trillion by 2020.

A book titled The Power of Impact Investing: Putting Markets to Work for Profit and Global Good, argues that, investors can play an important role in crafting a better world. The book was written by two people who are or have been associated with the Rockefeller Foundation (RF) which has been a leading global voice in the promotion of the well-being of humanity for more than a century. Judith Rodin who is president of the RF and Margot Brandenburg who was formerly the senior manager of impact investing at the RF. To illustrate their point they site a number of successful new business models that rely on impact investing.

In 2015 we saw some notable stories in the domain of SRI. As reviewed by Anne Field, in a Forbes article here are five highlights from last year.

Interest in benefit corporations grew in 2015 with legislation in five more US states and territories (Montana, Indiana, Idaho, Tennessee and Puerto Rico). The Benefit Corporation legislation legally mandates companies take into account non-financial considerations when making decisions. There are now 32 jurisdictions and 3,000 companies that have adopted this corporate form. Although not the same thing, there are now 400 new certified B Corps around the world.

The Etsy IPO in April boosted values driven human centered business. Etsy sells handmade and vintage crafts, they are a social enterprise and certified B Corp, that offers an alternative to traditional mass retail.

In October the Department of Labor posted guidance on economically targeted investments (ETIs). The move makes it easier for retirement plans to incorporate impact investments that address ESG factors in their portfolios.

Also in October new crowdfunding rules were announced by the Securities and Exchange Commission. The new rules allow non-accredited investors to participate in equity crowdfunding which will give smaller companies access to larger pools of funding.

In December Facebook mogul Mark Zuckerberg formally adopted impact investing. He and his wife Dr. Priscilla Chan have launched the Chan Zuckerberg Initiative that will contribute to nonprofits and private investments in innovative companies.

Other notable events in responsible investing last year include the growth of the divestment movement (now worth more than $4 trillion). Goldman Sachs, the nation's fifth-largest bank by assets, announced that it would launch an exchange-traded fund that would exclude fossil fuel-heavy industries. The US Department of the Interior formed the Natural Resource Investment Center designed to spur investments that could reduce water usage by up to 33 percent and annual carbon dioxide emissions by up to 1.5 percent.

In June the Global Impact Investing Network (GIIN) and Cambridge Associates issued "Introducing the Impact Investing Benchmark," the first comprehensive analysis of the financial performance of market rate impact investing funds. The benchmark comprises 51 private investment funds providing a broad view of the field. They published an essay titled, A Coming of Age for Impact Investing.

Investing in an environmentally responsible fashion can help to scale innovation, provide low cost clean energy, and even reduce workforce attrition. Most importantly for many investors SRI can provide significant returns particularly as far as combating climate change is concerned.

The business community is increasingly acknowledging the opportunities associated with combating climate change. An Accenture study found that 78 percent of CEOs surveyed from more than 100 countries see investing in sustainability as an opportunity for growth and innovation.

As cited in a 2013 Environmental Leader article, a survey found that the majority of impact investors are getting what they want from their investments both financially and socially. Measuring the performance of these investments is key and 80 percent of fund managers highlighted said that this is useful for raising capital.

The report, "Impact Investing 2.0: The Way Forward – Insight from 12 Outstanding Funds," stressed the collaborative partnerships with government. The same report said that such investments are an important source of seed funding that helps keep projects on mission.

The Forum for Sustainable and Responsible Investment (USSIF), in its 2014 Report on US Sustainable, Responsible and Impact Investing Trends, notes that nearly $7 trillion in U.S.-domiciled assets employ at least one (SRI) strategy. This up 40 percent from $3.74 trillion in 2012. According to this report impact investments have grown over 40 percent since 2012, to approximately $300 billion in 2014.

More research is needed to identify what makes a successful investment. We also need to explore the requirements of impact investors. Finally, while impact investment is here to stay, there is still a lot more that policymakers can do to make impact investing and SRI more attractive.

For more on what policy makers can do see the recommendations in the final G8 Taskforce report titled, Impact Investment: The Invisible Heart of Markets in 2014.

For more information on what governments have done to encourage impact investing see Impact Investing Policy in 2014: A Snapshot of Global Activity.

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