SG investing has come a long way over the past few decades. In the early stages, it was largely an exercise in exclusion, as investors constructed portfolios that avoided industries like tobacco, firearms and alcohol. The next wave was about integration and materiality—focused on questions of whether ESG factors were relevant to a company’s financial risk and return.
The third wave—a wave that is currently cresting—redirected our focus from firm to community and ecosystem, namely addressing the question of what impact a company is having on people and the world. Having moved from the fringe to mainstream, as the number of investment offerings branded as sustainable or impactful grows, so too does our general dissatisfaction with the metrics of impact and claims of materiality—topics which now increasingly take center stage. In this way, we’ve moved from values to generating value to impact, with investors asking questions, such as “how and where does my capital show up in the world?” And “am I creating not only economic value, but also the change I seek in the world?”
Impact investing is increasingly focused upon the creation of net positive impact, considering all externalities, both positive and negative. And it will now bring increasing focus on outcomes and understanding how much meaningful change we are truly creating.
Impact capital will increasingly be structured as patient capital, taking the long view. Transformation doesn’t happen overnight and investors seeking to make a difference need to be mindful of that. In some cases, this will require a different mindset from how money is managed today, with investors moving from a focus on liquidity and quarterly performance to long-term holding company and fund structures. Triodos Organic Growth Fund, an evergreen fund financing organic agriculture, is just one of a growing number of such strategies.
Ultimately, all investing will—and increasingly does—consider ESG elements, as investors move to open their aperture of analysis to include a broader consideration of factors effecting total performance. As such, our investing approaches will be additive, not restrictive. They will start with fundamental investment practices and then integrate considerations of social and environmental impact. ESG Investing will build on what works with traditional investing, as augmented by greater consideration of “off balance sheet” risk and opportunity.