This article is a part of the NordSIP Insights – Handbook – “Investing Along the 17 Shades of SDGs”.
by Gavin Power, Chief of Sustainable Development, PIMCO
Impact investing is anchored in a fundamental belief that over the long term, healthy societies and healthy markets go hand-in-hand.
In October, the global conservation organization WWF issued a landmark study that should – in this writer’s view – be required reading for the investment community. Titled “The Living Planet Report 2018: Aiming Higher,” and based on deep empirical evidence and analysis of global trends, this paper credibly posits that we are on the cusp of a truly historical transformation – one that will affect markets, economies and societies everywhere. And this transformation is not good.
The report’s driving argument is that exploding human consumption – and related demands for resources including energy, land and water – is now stretching Earth’s systems to a breaking point. “There cannot be a healthy, happy and prosperous future for people on a planet with a destabilized climate, depleted oceans and rivers, degraded land and empty forests, all stripped of biodiversity, the web of life that sustains us all,” the report states, noting that “natural capital” and its benefits to economic activity is estimated to be worth around $125 trillion a year.
While the focus of this report is primarily on environmental issues, it also addresses major socioeconomic disturbances, including inequality in the distribution of wealth and resources within numerous societies – with clear connections to political and social upheavals and tensions. In turn, these disturbances could have critical implications for the economy. The Financial Times published a lead editorial on the report, so compelling were the links to the macroeconomic performance of economies, sectors and financial markets.
So, what does this have to do with the advancing field of impact investing? In a word: everything.
Impact investing: addressing the influences of human activity globally
At its heart, impact investing – as it is evolving today – represents an important shift in investment mindset, and one that holds the potential to change the arc of human history in ways likely to benefit economies and markets. Understanding the damaging transformational impacts that human activity – in economic, social and environmental terms – is causing in myriad systems, today’s impact investors seek to unite financial returns with positive impacts that at a minimum are doing no harm and at the maximum are delivering meaningful and measurable beneficial outcomes to people and planet – blunting or even reversing the malign impacts. This is both a financially grounded and ethically motivated agenda anchored in a fundamental belief that over the long term – or super-secular horizon, if you will – healthy societies and healthy markets go hand-in-hand.
Impact investing may need to become a defining philosophy for the global investment community – augmenting and, at some future stage, perhaps even supplanting today’s more risk-oriented ESG (environmental, social, governance) investing movement and, in the process, truly aligning finance and society in ways beneficial to all.
This will take some time and effort as even the multitude of ESG strategies currently offered across markets globally don’t represent the complete spectrum of investment asset classes. And in too many firms, ESG remains siloed and considered an exotic – or worse, eccentric – area. ESG’s focus on managing key environmental, social and governance risks is designed to support positive societal outcomes in addition to offering risk-adjusted return potential, and thus ESG embraces in many ways the principles of impact investing. After all, ESG investing can help remove obstacles to global sustainable development and foster critical change. Impact investing simply shifts the focus even further by enshrining positive societal outcomes as key investment objectives.
Impact investing could help create a brighter future for societies, economies and markets, but there is much runway to cover. A recent survey by RBC Global Asset Management found 29% of institutional investors said they expect to allocate funds to impact investing in the next one to five years, noting that this is up from 20% in 2017. So, a majority is not switched on – yet.
How do we help propel impact investing?
First, we need to innovate and create new strategies that recognize and target the inherent financial opportunities. Impact investing can and does create results: For example, see the multilateral development banks whose portfolios and books of private sector investments show long track records of revenue-generating projects and assets that are delivering measurable development impacts in social and environmental terms.
Another area of significant opportunity relates to so-called sustainability bonds – be they green bonds, social bonds or SDG bonds (more on the UN Sustainable Development Goals in a moment). Building on the fast-growing market in green bonds, we at PIMCO see enormous promise in new bond issuance by companies and sovereigns that addresses key societal challenges related to health, gender, education or infrastructure more broadly.
Second, we need to fully embrace the UN Sustainable Development Goals and impact investing’s overarching framework. As a former UN official, I can relay that the SDGs and the related targets were painstakingly developed via a deeply consultative and informed global process, bringing together the world’s leading subject experts, policymakers and leaders from business and civil society.
The SDGs’ 17 socioeconomic and environmental goals can be seen as a gift to investors and should be used as the global framework to direct and measure impact investing strategies.
Third, at this crucial juncture, we need to break down professional siloes and collaborate as never before. The UN is doing important work engaging the private sector and private finance, but we must recognize the collective effort that needs to be undertaken – lifting all boats in the process. We need new partnerships and collaborative efforts that bring together policymakers, business and finance leaders, and civil society representatives. The SDGs can provide a common language, and impact investing a shared strategy.
The “Living Planet Report” concludes that there is currently a unique window of opportunity to reverse the trend toward decline in the natural systems that support modern society, noting “everyone – governments, business, finance, research, civil society and individuals – has a part to play.”
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