Can impact investment generate substantial changes?

Can impact investment generate substantial changes?

29 September 2022

How can impact investment really generate substantial changes?

 Lara Viada

Lara Viada is a partner at CREAS, a fund managing social impact investments. EFE Verde

When I landed in impact investment 10 years ago, the idea that the financial market would transform to help reduce poverty and mitigate climate change still sounded completely naive and impossible.

The gap between governments and NGOs, traditionally in charge of solving social problems, and businesses, focused only on maximizing profits for shareholders, was too large.

This mindset has changed with the same determination, and today we see how large capital managers incorporate ESG and impact investment strategies into virtually all their portfolios.

And although this evolution has been much faster than I imagined, and the sector has grown and professionalized, I have the feeling that we are still just on the surface and that this growth has not been accompanied by the deep changes we were hoping for.

According to the Global Sustainable Investment Review, ESG investment reached $35.3 trillion in 2020, representing a third of the assets under management of the major economies. Impact investment, on the other hand, has also grown exponentially, and in 2020 the Global Impact Investment Network valued the sector at $636 billion, with growth rates of over 50% year on year.

It is paradoxical that if indeed a third of global assets prioritized social and environmental impact, we have not yet seen substantial changes in key indicators such as inequality or global warming.

In fact, in these 10 years both indicators have worsened, and today there is almost no data to support that ESG investment has had any relevant macro effect, neither in reducing emissions nor in improving diversity in companies.

The problem? The subjectivity when defining the concept "sustainable investment" which encompasses everything from impact investments to funds that simply integrate ESG analysis into their decisions.

This subjectivity will improve in the future with European regulation within the framework of the green deal, taxonomy, and SFDR, which will generate more rigorous information, clarify concepts and reduce greenwashing.

And the big mistake? Our definition of success. In the numerous articles that analyze the growth of ESG and impact investment, an analysis of success measured in terms of growth of assets under management and financial returns still prevails.

The change will come when we are able to value investments, by the value they generate for society and the planet beyond pure financial return.

We need a profound change in our conception of value, because the reality is that talking about integrating and prioritizing social impact in investments as a win-win is not always true, as often prioritizing impact involves short-term trade-offs, especially when we want to make profound social changes in the most neglected people.

Generating changes sometimes involves improving and sophisticating the ability to measure impact and push projects that dare to think differently. Initiatives such as Impact Weighted Accounts or the Value Balancing Alliance that integrate impact and accounting will certainly help. Or impact companies that put purpose at the heart of all their activity, as well as impact funds like Creas that support them and promote impact as a key lever for long-term value creation. Yvon Chuinard, CEO of Patagonia gave us a wonderful lesson this month by putting his purpose of saving the planet ahead of his economic wellbeing.

I firmly believe that we all want to do things right and leave a better world for those who come after us.

But we must ask ourselves, how much effort are we willing to put in to make these changes happen? How can we change our mindset so that a lower financial return in the short term is not perceived as a sacrifice but an opportunity to highlight a greater social or environmental return?

Article by EFE Verde here