Impact Investing and the Power of Intention

Annalise Durante, Senior ESG Analyst and Investment Counselor, provides perspective on the indispensable role of impact investing in directing capital towards societal and environmental betterment.

When Dr. Mohammad Yunas won the Noble Peace Prize in 2006 for his pioneering work in establishing Grameen Bank in India, it provided a powerful signal to the world that “impact” investing had arrived. Grameen Bank’s mission was to make small, uncollateralized loans to women in rural India. By the time the Prize was awarded, Grameen Bank had disbursed an astounding $5 billion to over five million women. Today, the impact investing landscape is quite diversified but shares the same goal as Grameen Bank: leverage market solutions to generate profits while also creating positive social and/or environmental impact alongside a financial return.

This sets it apart from ESG investing, which utilizes data on environmental, social or governance (ESG) factors to help identify risk or opportunities, as well as socially responsible investing (SRI), that primarily focuses on aligning investments with stated values, often through exclusionary screening.

“Intention” is a key facet to impact investing. It is more proactive in its pursuit of making a positive impact compared to ESG or SRI. The notion behind impact investing is that governmental and philanthropic funding alone is not enough to solve the world’s problems. According to the Organization for Economic Co-operation and Development (OECD), the annual financing gap to achieve the Sustainable Development Goals is $3.9 trillion.¹ It is clear that private capital must also be mobilized alongside public funds to find sustainable and systemic solutions for challenges like climate change and poverty.

Impact investing has helped establish that investment returns and positive impact do not have to be mutually exclusive. In fact, there is a solid business case for making such investments. Within each problem, lies multiple investment opportunities. For instance, addressing climate change presents opportunities in carbon removal, renewable energy, regenerative agriculture, and sustainable materials, to name a few. Similarly, the challenge of poverty opens doors to investment in access to education, healthcare and water, infrastructure improvements, affordable housing, and programs supporting women and minorities. These issues may feel overwhelming, but so is the opportunity to invest in their solutions.

Impact investors range from banks, pension funds, and foundations to individuals, private equity firms, development finance institutions and corporations. Religious institutions have also been key proponents of impact investing, as seen in Pope Francis’ vision of “putting the economy at the service of the peoples.”² Impact investments can span across asset classes, sectors, geographies, themes, and investment vehicles. According to the Global Impact Investing Network’s (GIIN) annual report, the global impact investing market’s size is roughly $1.16 trillion.³

Broadening Avenues for Impact
Historically, community investing and microfinance played integral roles in impact investing, typically in the form of low-income housing loan funds or promissory notes. However, as private equity emerged as an asset class, it began to dominate the impact investing space as well, either through direct investment in companies or private equity funds. While it was positive that capital was directed toward social and environmental issues, the high minimum investment requirements, and risk profile of private equity often excluded the average retail investor. Fortunately, as impact investing gained steam and more companies incorporated social or environmental impact into their ethos, accessible opportunities to invest with impact expanded.

One approach is to invest in the stock of publicly traded companies that generate positive social or environmental impact through their products or services. At Bailard, we have an investment strategy called Bailard Broad Impact that follows this approach. Impactful investments can also be made within fixed income portfolios. Over the last decade, there has been tremendous growth in bonds whose proceeds are earmarked for environmental or social impact projects. Examples include green bonds for environmental initiatives and social impact bonds linked to social outcomes for service users. Some fixed income instruments also help fund microfinance and community investments.

Often, impact investments are aligned with themes aimed at addressing specific problems. As part of our Bailard Broad Impact investment philosophy, we have identified numerous impact themes that we believe provide investable solutions. For example, the Decarbonization theme seeks to have a positive impact on the issues of carbon emissions and climate change. We may invest in companies that produce geothermal power, generate energy from ocean waves, or electrify transportation. Within the theme of Financial Inclusion, investments target companies working to improve access to capital and banking tools for low-income communities without charging exorbitant interest rates. Each theme encompasses a broad range of industries, sectors, and types of companies that align with its objectives.

Measuring, Tracking, and Communicating
One crucial component of effective impact investing is impact measurement. Promised impacts must be measured and tracked to ensure accountability. Sometimes impact is straight-forward to measure, such as quantifying carbon emissions or water usage reduction. However, quantifying impact can be difficult and complex, especially when issues involve multiple stakeholders and long-term outcomes. Best practices for impact managers include establishing impact key performance indicators (KPIs) from the outset that can be measured and tracked, and transparently communicating those KPIs to investors. As companies increasingly disclose data related to social and environmental issues—and regulations mandating such disclosure evolve—the practice of impact investing and measurement will continue to improve.

Using investments as a catalyst for change is not a new concept. In fact, some form of impact investing has been present since the inception of capital markets. Municipal bonds, for example, have been around since the very origins of the United States, directing capital into vital infrastructure like highways, schools, hospitals, and airports. With today’s social and environmental challenges far exceeding governments’ ability to solve them, impact investing can play a pivotal role in directing capital to benefit society, the planet, and investors alike.

1 Organisation for Economic Cooperation and Development (OECD. (2022, November 10). Global Outlook on Financing for Sustainable Development 2023: No Sustainability Without Equity. https://doi.org/10.1787/fcbe6ce9-en
2 https://www.viiconference.org/
3 Hand, D., Ringel, B., Danel, A. (2022) Sizing the Impact Investing Market: 2022. The Global Impact Investing Network (GIIN). New York.