FEBRUARY 2018

Top 5 Takeaways from the Investing for Impact Conference

Category: Impact Investing

By Douglas Cohen, Managing Director, Portfolio Management

This month The Economist held its second “Investing for Impact” conference in New York City. The event drew over 200 attendees including financial professionals, institutional investors, policymakers, academics, impact investors, and philanthropists.

This year’s gathering focused on the world at a crossroads—from equality of opportunity to climate change—and how growing uncertainty is attracting increased interest from investors. Throughout the conference, panelists debated whether investing for impact will remain a niche in the financial industry, or whether it will become a powerful agent for global change.

I offer the following 5 takeaways from the “Investing for Impact” conference.

1) Impact investing still has a lot to prove
There is growing awareness among investors about the value of ESG (environmental, social, governance), long-termism, and impact investing. Recent studies show that 75% of asset owners are interested in impact investing, and 86% of millennials desire to invest in ways that reflect their social and environmental values. Approximately $9 trillion is currently invested in “impact,” showing that significant capital is flowing to these strategies. This calculation uses a broad definition of the term, however, and debate continues as to what should be included.

Further, while impact investments are attracting more and more capital, many have yet to produce a long-term track record. This continues to cause risk aversion, particularly among institutional investors that cling to the Milton Friedman-inspired view that businesses that attempt to maximize shareholder value will ultimately do the most societal good. Indeed, according to one survey cited at the conference, only 30% of the chief investment officers at America’s largest pension plans consider ESG factors to be important considerations in investment decision making (up from about 10% twenty years ago). Impact investments will need to provide more evidence of their effectiveness; otherwise the industry will be challenged to advance.

2) Capital can be an effective change agent
Most panelists agreed that impact investments will meet the challenge of delivering the necessary performance data, particularly as track records mature. Audrey Choi, chief sustainability officer at Morgan Stanley, noted that most studies have shown that companies focused on material ESG factors perform better financially. Harvard, Oxford, and Morningstar have recently published studies that show a positive correlation between impact investing and returns. This view was not universally shared, however. Some speakers insisted that the academic evidence is not yet persuasive—largely because of the inherently subjective nature of what qualifies as “true” impact. Nonetheless, throughout the conference, panelists pointed to BlackRock Chairman and CEO Larry Fink’s January letter urging companies to demonstrate a social purpose as they pursue a long-term growth-oriented strategy as a watershed development for impact investing.

3) The laws of good investing still apply
Audrey Choi of Morgan Stanley also reminded attendees that “the laws of good investing still apply” to impact investing. As with any investment, due diligence, analysis, and manager selection are essential before committing capital. There will always be a bell curve of investment outcomes, just as in traditional finance. Still, as Ms. Choi emphasized, more information is almost always better when it comes to investing and in that sense, why would one want to ignore a company’s ESG-related culture and capabilities?

4) Diversity reduces risk
Investors have traditionally under-valued the contributions of women in the economy. Investment strategies are emerging that recognize the growing influence of women, as well as the more general economic value of diversity.

Jean Case, chief executive of the Case Foundation, commented that when the composition of a group is more diverse, it produces a broader range of ideas and breakthroughs. Investors should not want more diversity merely because it checks a box; they should want it because it leads to a better economy.

Athena Capital recently released a white paper that offers our thoughts on investing to achieve gender equality, including specific gender inclusive investment strategies that seek to empower women by increasing their access to capital, advancing workplace equity, or creating new products and services. The full paper can be accessed here.

5) There is no clear consensus as to whether the public or private sectors should take the lead in driving change
Many speakers and attendees (based on audience polling) believe that the private sector should take the lead in implementing impact-oriented strategies. They argued that the best talent typically wants to work in the private sector where innovation can thrive (e.g., electric automobiles). A similar number of participants came out on the other side, noting that government, as the largest investor in the economy, has the best tools to drive social progress. Not surprisingly, the discussion pointed to several examples highlighted where the private and public sectors intersect. For example, if the coral reefs of a tourist-oriented city are in danger due to climate-related activity, why not form a business/government partnership to increase awareness and seek to take action to stabilize the reef? Would governments be more likely to combat the effects of climate change if, for example, private rating agencies downgraded government debt in situations where a local government has not taken action to reduce the risk of wildfires?

Looking Ahead

The subjects addressed at the “Investing for Impact” conference were challenging and thought-provoking. It is clear that impact investing has already achieved considerable progress and has plenty of room for further growth. I look forward to attending The Economist’s conference in 2019 and continuing to engage with the industry’s top minds on the challenges of this increasingly dynamic portion of the investment landscape.

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