THE IMPACT FINANCE REVOLUTION

Sir Ronald Cohen

[Over the next few years, we can expect to emerge new leaders in finance, who know how best to balance risk, return and impact, and boost the flow of capital that improves lives and the planet while delivering attractive financial returns.]

A revolution is underway in the way finance is used to improve lives and the planet.

Until now, the model has been that finance focuses just on the bottom line and the safety of depositors, but new thinking is taking root.  It argues that investors, entrepreneurs and other business leaders can no longer view as acceptable decisions that are based solely on risk and return, that decisions should be made on the basis of a combination of risk, return and (societal-environmental) impact. This thinking is driving impact investing and impact entrepreneurship.

More than 1,200 investment institutions and US$ 53 trillion worth of investor assets have signed up for the United Nations Principles of Responsible Investment (PRI), which state that, “an economically sufficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.”

Large pension funds such as PGGM in Holland and large foundations such as the Ford Foundation in the USA, have allocated billions of dollars to investments that create positive impact.  And many new entrepreneurial business models (Toms Shoes, The Gym, Rubicon, Tesla, Solar City, etc.) seek to achieve measurable social and environmental returns alongside financial returns.

The invention of Social Impact Bonds (SIBs) is a powerful expression of this thinking. There are 74 across the world, in 18 countries, tackling an array of 14 social issues – among them adoption, foster parenting, dropout rates from universities and schools, homelessness, unemployed youth, recidivism, diabetes, and the prevention of strokes. They link measurable social improvement to a commensurate financial return.

This change in thinking is leading to a paradigm shift in the way investment flows are being directed. We see signs of this shift in the launch of socially responsible investment and impact funds launched by the likes of BlackRock, Goldman Sachs, Bain Capital and TPG, as well as in the efforts of Bank of America-Merrill Lynch, Morgan Stanley and UBS to provide impact investment opportunities to their high net worth clients.

 

All of this has brought impact to become a mainstream subject, whether it be achieved through Socially Responsible Investment (SRI), Impact Investment or Philanthropy. Impact investment’s rigorous focus on setting measurable impact objectives and measuring the performance in achieving them is disrupting the established models of both business and philanthropy. Impact is a lot easier to measure than we have assumed, and certainly much easier to measure than risk. While it may be difficult to measure improvement in the life of a released prisoner who is helped to avoid returning to prison, it’s very easy to measure the number of prisoners returning to prison relative to historic numbers or a control group.

 

Finance is the next major sector in line for major disruption through technological innovation. Apps are being designed to reduce the cost of borrowing, improve the management of personal finances, and help the poor escape the burden of disproportionately large debt relative to earnings. Big data analysis makes it possible to identify patterns in financial needs, to score credit risk according to behavior patterns, and to make it possible for depositors to receive interest on current accounts while reducing the cost of overdrafts.

 

The millennial generation is driving impact entrepreneurship forward, motivated by a strong desire to improve the world. It is finding greater meaning in entrepreneurship and employment by doing good while doing well. At the same time, increasing support for impact investment from governments across the world -through the release of unclaimed assets, tax incentives, and capacity building grants for not-for-profits – are helping to move impact investment towards the mainstream of finance.

Over the next few years, we can therefore expect to see an increase in the number of impact investment firms, endowments that set impact allocations and financial organizations that measure the social and environmental impact of their activities. There will emerge new leaders in finance, who know how best to balance risk, return and impact, and boost the flow of capital that improves lives and the planet while delivering attractive financial returns.

 

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