The future of impact investing was the hottest topic on my recent tour of the Boston impact investing conference circuit, which included the New England Impact Investing Initiative/Building a Sustainable Investment Community (BASIC), Boston’s Net Impact Summit, and the Harvard Social Enterprise Conference. My list of all the 2018 trends discussed at these events, has 20 trends on it! Wow, that’s a busy year. This blog post is my attempt to distill these trends into four buckets (many of which are linked) and see whether CFI readers agree with this general direction for impact investing in the year ahead.
1. Important Industry Shifts
Wealth transfer. A reported $40 trillion in wealth will be transferred over the next 30 years to women and millennials in the United States. Both of these groups have expressed strong interest in investing aligned with their values, with millennials demonstrating they are deliberate about the social impact of their retirement funds.
Evolution of the Socially Responsible Investing mindset. Impact investors are no longer okay with simply “not doing bad” by screening out oil, guns, and other areas with negative externalities. Increasingly, investors are focused on ensuring that they are “actually doing good” and having a positive social or environmental impact (linked to the “evidence based” trend below). Nothing signifies this mental shift in the investment world better than BlackRock’s recent letter to CEOs urging them to “blend the lines between impact investing and the profit-driven investment space.”
Paradigm shift in “traditional” investing. There is increased recognition among impact investors that the traditional financial tools and investment structures are restricting and limit innovation. Impact investors are therefore becoming more comfortable with blended financing approaches, like pay for success models. And they are warming up to the idea that impact investors also need to include capacity building in their investment discussions.
2. Creating a “Bigger Tent” in Impact Investing
Becoming more mainstream. There is a move toward greater inclusivity as the notion of “impact” becomes more integrated into traditional investments, which in turn is bringing more wealth into the impact investing realm.
- Sustainable Development Goals (SDGs).The SGDs act as a focal point for mobilizing more private sector capital, needed to fund the $2.5 trillion development investment gap.
- Big entrants. KKR, Bain, TPG, and Goldman Sachs are just a few of the big players in an expanding group of new companies raising capital for impact investments that meet environment/social/governance (ESG) criteria.
- Increased diversity in the impact investor pool (linked to the “wealth shifts” trend above) is making for more diverse impact investments, and a stronger industry.
- “Resist” investing – There is a “Trump bump” among wealthy people in the U.S. who are angry at both Washington and Wall Street and who want to invest to counteract what they see as the negative impacts of both spheres.
- Philanthropy can have an empowering effect on impact investing because the sector’s higher risk tolerance helps to create enabling environments for impact investments to thrive.
Democratizing impact investing. There is greater movement to bring impact investing to more people, and there are more impact investing options available to ordinary investors through public markets.
- Impact-focused online platforms such as OpenInvest, Swell, Hedgeable and Wealthsimple increasingly enable investors to mix and match among impact themes and offer a more transparent and customizable variety of impact investing.
- Robo advisers are getting better at tailoring portfolios based on social values for low costs.
- Mobilizing masses. The power of the millennial generation in impact investing may be their ability to mobilize smaller funds in massive numbers. The Calvert Community Investment Note provides an investment option online for a starting investment of only $20 USD.
- Retirement funds increasingly provide social impact options. Among the many options, impact-minded folks may choose TIAA-CREF’s “Social Choice”, Social(k), or Green Retirement, Inc. for their retirement.
3. Demonstrating the “Impact” in Impact Investing
Evidence based. Increasingly there is a need for impact investors not only to state clearly, but also to provide evidence of their impact. As the impact investing tent continues to grow, this clarity and differentiation will become increasingly important.
SDG covenants. Specific alignments with the SDGs are being written into contracts more often.
Compensation tied to social goals. More impact investors are starting to tie their own compensation to the social goals met by their investments, to ensure aligned incentives.
B-Corp movement. This certification of impact is growing in its visibility and power. B Analytics is a data platform that analyzes B Impact Assessment data.
4. Specific Opportunities
Tax incentives for Opportunity Zones. The recent tax bill passed in the U.S. contains tax incentives for investors who make investments in low-income communities designated as “Opportunity Zones”. Investors can defer capital gains, and any post-acquisition gain if the investment is held long enough, incentivizing long-term investments in economically disadvantaged areas of the U.S. The new tax law may reduce the marginal tax benefit of charitable giving by more than one-quarter in 2018 but a drop in philanthropy may mean an increase in tax-incentivized impact investing.
Community housing. Whether explicit or not, community development groups have a gender lens because women are typically poorer than men. Tailoring products, like mortgages, to the needs of women is a way of redefining the gender lens on products that for many years have negatively targeted women with predatory mortgages.
Community investing. A great way to get into impact investing is for investors to look at their own communities. Organizations like the Ujima Project are great ways to do this. This particularly struck home for me as I was leaving one impact investing event on a cold Boston night and drove past a line of people waiting to get into a homeless shelter.
Blockchain could revolutionize impact investing with its focus on data transparency (linked to the “evidenced based” trend).
Energy. There are lots of opportunities to invest in energy, including through the green bond movement.
A recent ImpactAlpha article on how to create a bigger tent for impact investing sums it up, stating: “The time to start impact investing was 100 years ago. The second-best time is now.” That certainly seems to be true for 2018! The time to mobilize is now, and the galvanizing point is the SDGs. The ways to get there are infinite, but they require a shift in the thinking that got us here.
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