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Introduction To Mainstream Impact Investment

This is the first in a series of articles written for industry professionals to introduce the concepts and methodologies for an approach to investment characterised as Mainstream Impact Investment (MII). This article was written to introduce the reader to Mainstream Impact Investment.

I’m not sure when the term Mainstream was first appended to the phrase Impact Investment, but it certainly helps us draw a distinction between the many different interpretations of the phrase.

Broadly speaking, the term Impact Investment is associated with projects spanning the entire economic spectrum from philanthropy at one end to for-profit ventures at the other end.  However the common thread is that they all aim to deliver measurable impacts.  

Whereas most of the narrative concerning Impact Investment tends to be focused on projects at the boundaries of the economy, typical in marginalised and deprived areas of the world, by contrast, critics of the mainstream markets have long maintained that it is the negative consequences of conventional economics and its impact on local communities or society at large and on the wider environment, where the need for reform is most acute.  

In sharp distinction, Mainstream Impact Investment (MII) focuses on the mainstream markets but adopts a much more holistic approach that recognises the essential interdependence between the economy, society and the environment. 

Clearly the global context for business is steadily changing. Business decisions are being made against an unprecedented backdrop of uncertainty.  Concern for the long term resilience of our economies is compounded by many macro-economic factors such as the Covid pandemic, the debt crisis in Europe, UK and the US as well as by the challenges of global warming, water scarcity, income disparity, social unrest and extreme poverty.

These are all indicators of systemic failure of businesses and the resultant economies, to create value at the scale required to overcome these challenges.  It should be a salutary warning to all of us, that investment decisions must be carefully considered if we’re to foster businesses that aim to mitigate or adapt to these challenges.  Furthermore, given the scale of the challenges, and the scale of the investment needed to overcome them, returns must be seen to match or exceed market rates. 

Consequently, any investment strategy must be based on the conviction that the transition to a more resilient economy must inevitably be led by well governed businesses that strategically manage their social and environmental impacts. 

The key to success for investors will be identifying companies that are led by business leaders who also understand the significance of this and are building their businesses to mitigate, adapt and even capitalise on the opportunity that responding to these challenges presents. 

This is what is meant by Mainstream Impact Investment.  It’s an approach that creates wealth at competitive rates by investing in well governed businesses operating in mainstream markets, that reduce the environmental impact of creating value for society. I’m referring to businesses that strategically manage their social, environmental and governance (ESG) factors, i.e those that are aware of the negative consequences of their activities and are doing something about them and in so doing, break the link between economic growth and environmental destruction – uncomfortable bed fellows that have gone hand in hand since the start of the industrial revolution.

So let’s be under no illusion; the objectives of Mainstream Impact Investment are no different than those of any other well managed fund. The aim is to create wealth for investors at competitive rates. However, in practice, this is achieved by integrating rigorous financial analysis with sustainability research. 

This approach just makes good business sense.  Analysing how businesses mitigate or adapt to disruptive macro-economic factors  and the negative consequences of their own activities, helps analysts build a more robust case for their investment decisions. A key difference is that analysts will discriminate against those that see sustainability and business as competing agendas or as a compliance exercise. 

Adopting an MII approach means identifying businesses that are fundamentally structured so that economic success is not undermined by the negative consequences of their own activities.  In one sense, analysts are looking for business leaders who know how to break the link between economic growth and environmental destruction.  

In practice, this involves understanding how businesses manage risks or factors that could disrupt financial performance.  It is essential to understand how businesses are structured to identify the negative consequences of their activities, but also how they go about mitigating or adapting to them.   

Crucially, an MII approach reveals much more about the culture of the organisation and the mindset and motivation of its leaders, which as investors, is the key insight analysts need to understand how well a business is structured to respond to factors that could otherwise disrupt their stated plans for growth.

The burning question of course is where is the evidence that economic growth and sustainability thinking are not competing forces.  After all wasn’t it Milton Friedman who described such thoughts as “unadulterated socialism which have no place in business“. 

The emergence of reporting standards such as the GRI (Global Reporting Initiative) and the numerous agencies measuring ESG performance has led to countless reports concluding that there is a good correlation between the performance of listed companies with good ESG metrics when compared to their peers.  Even Barclays produced a report, the first in their impact series, that drew similar conclusions for the bond markets.  

The fact is there are success stories right across the economic spectrum.  It may surprise you to know that there are many companies generating revenues in excess of $1Bn just from lines of business that subscribe to these values.  As other observers of the subject have pointed out, the top 10 alone are generating revenues in excess of $100Bn.

Take for example IKEA, which is committed to increasing sales and lowering impact by sourcing raw materials, like cotton and wood, from suppliers with responsible production methods, and it is powering its factories using renewable energy.  Unilever is committed to doubling sales and halving its environmental footprint by 2030. 

We should also be mindful that the global population is expected to reach 10Bn by 2050 and with 70%, or approximately 7Bn, expected to be living in cities, that means that between now and then cities are going to be built to house the equivalent of the entire present day population of the world, which currently stands at 7.3Bn.  The opportunity for development is staggering, but so too is the challenge of doing this sustainably.

To summarize, there are many well informed business leaders building long term value creation models and there are many investors who also understand the significance of what we’re talking about here.  

Mainstream Impact Investment has a distinct strategy aimed at focusing investment on fostering responsible businesses.  Whatever your view, it is difficult to contest the assertion that inevitably the transition to a resilient economy must be led by well governed businesses that succeed by striving to reduce the environmental impact of creating value for society.  So I guess you’re either part of the problem, or you’re part of the solution, but a Mainstream Impact Investment approach certainly gives a mandate to investors who wish to align their financial portfolios with these values.

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