Appending the word Mainstream to the phrase ‘Impact Investment’ certainly helps us draw a distinction between the many different interpretations of investment strategies that take Environmental, Social and Governance (ESG) factors into account. 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. The common thread is that they all aim to deliver measurable positive impacts. However, most of the narrative tends to be focused on projects at the boundaries of the world’s economies, typical in marginalised and deprived areas of the world where there is much need to deliver positive ecological and societal impacts.
However, critics of the mainstream markets have long maintained that it is the negative consequences of conventional economics and their impact on local communities, society at large and on the wider environment, where the need for reform is most acute. Businesses create value for society with the products and services they deliver and support local communities through employment and the taxes levied help support public services, but the underlying economic activity inevitably has unintended consequences. It is the profit end of the economic spectrum where the need to foster positive impacts is paramount.
It is important to recognise that almost all economic activity has a negative impact, especially on the wider ecosystem and it is the accumulated effect of these impacts that is altering the environment in ways that are threatening the conditions that hitherto have allowed human life to flourish. The elephant in the room is the negative impact of all our economic activity and so it is essential we foster businesses that strive to reduce the impact of creating value.
Therefore, by contrast and in sharp distinction to Impact Investment, 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.
In practice an MII approach creates wealth at competitive rates by investing in well governed businesses operating in mainstream markets, that strive to reduce the environmental impact of creating value for society; I’m referring to businesses that are evidently managing their social and environmental impacts; 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.
To really understand the value of MII and how it differs from any other approach to investment, it is necessary to appreciate the relationship and interdependence of the economy, society and the environment. This is best illustrated by the ‘Nested Dependency Model’; a resilient economy depends on a stable society, but our communities, nations, indeed all of humanity is utterly dependent on the environmental conditions that allow human life to flourish. These conditions were the product of 3.5Bn years of evolution and yet the economic activity of our industrial revolution has altered the chemistry of the atmosphere, the oceans and the essential biodiversity of the ecosystem to the extent that these conditions now pose an existential threat to the stability of our societies and the resilience of our economies.
Understanding interdependence within the context of MII helps us to interpret the likely impact of business decisions. It also sets the direction of travel for business leaders and as analysts, helps us distinguish those that align with MII values. In simple terms it clarifies priorities and supports the principle that whatever economic activity is required to create value for society, this must be achieved by reducing the impact on the environment. The transition to a resilient economy must inevitably be led by well governed businesses striving to reduce the environmental impact of creating value for society.
It’s also worthwhile considering the effect of widespread concern for the resilience of the world’s economies and it is not surprising that critics of the mainstream markets have long recognised that the global context for business is steadily changing. Business decisions are being made against an unprecedented backdrop of uncertainty compounded by many macroeconomic factors such as the Covid pandemic, rising national debt as well as the challenges of global warming, water scarcity, income disparity, social unrest and extreme poverty.
The scale and pace of new factors threatening the resilience of our economies are indicators of the systemic failure of businesses and the resultant economies to create value at the scale and pace required to overcome these challenges. It is also a salutary warning to all of us, that investment decisions must be carefully considered if we are to foster businesses that aim to mitigate or adapt to these challenges.
On the upside, slowly but surely government policies and social attitudes are changing and many business leaders, entrepreneurs and innovators are rising to meet these complex challenges. A key driver for MII is to capitalise on the opportunities that responding to global challenges presents. Consider this; 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 7.3Bn population of the world. The opportunity for development is staggering, but so too is the challenge of doing this sustainably.
MII is based on the conviction that the transition to a resilient economy will inevitably be led by well governed businesses striving to reduce the environmental impact of creating value for society and as others have observed, this will become the most significant process in modern economic history, matching the industrial revolution in scale and the technological revolution in pace. Whereas financial markets have a responsibility to support this process, investors too are also increasingly aware of the significance of this transition and given the scale of the challenges, and the scale of the investment needed to overcome them, it is essential that their returns match or exceed market rates.
So let’s be under no illusion, the objectives of MII from an analysts perspective are no different to any other well managed fund. The aim is to create wealth for investors at competitive rates albeit by integrating rigorous financial analysis with sustainability research. 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 MII analysts have the insight needed to discriminate against those that see sustainability and business as competing agendas or as a compliance exercise. Importantly, they have the skills needed to identify businesses that succeed because they’re fundamentally structured to break the link between growth and environmental destruction and not in-spite of this.
Mainstream Impact Investment has a distinct strategy that creates wealth by investing in responsible businesses. Within the context of the value businesses create for society, MII is selecting the best in class as far as environmental impact is concerned. These are businesses fundamentally structured to identify risks, changes in policy and social attitudes and to mitigate the negative consequences of their economic activities. Importantly, these are businesses capitalising on the opportunities that responding to global challenges presents.
The MII approach is just good business sense, it takes into account a broader range of factors that reinforce investment decisions. 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 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 MII is a mandate for analysts and investors alike to align their financial portfolios with these values.