August 20, 2012

Waiting for Godot? Time to Take Action on Impact Investing

In Samuel Beckett’s seminal play, Waiting for Godot, two protagonists kill time while they wait for a mysterious man named Godot to show up and save them. It is evident that the duo has been waiting for Godot for some time, but Godot hasn’t shown up. They decide that they should leave the scene, but never end up taking any action.

The protagonists’ failure to realize that their act of waiting for Godot is in fact a choice is one of the main themes of the play.

This apparent inaction and desire to stay within the confines of what is safe reminds me of our own inadequate actions to address mounting social and environmental problems.  While much philanthropic capital has been deployed in an attempt to tackle these problems, it has not nearly been enough (representing less than 1% of global financial capital)1 or fully efficient in achieving the desired impact. Though the concepts of socially responsible/sustainable investing and, more recently, venture philanthropy and impact investing have attracted interest from forward thinking investors, for the majority, these concepts remain niche. It is imperative that we direct greater portions of our financial capital towards addressing these challenges, and that we begin to do so now.

Among investors, foundations are becoming increasingly aware of the disconnect between their charitable mission and the level of capital deployed towards the achievement of that mission. Many are looking to more closely align their investment dollars with their mission and values through Program Related Investing (PRI) and Mission Related Investing (MRI). In Canada, incentives have existed for foundations to participate in PRI since the release of the 1999 guidance for Registered Charities by the Canada Revenue Agency (CRA) which allowed charities and foundations to count their PRI investments – expected to generate a return, albeit below prevalent market rates – towards their annual grant disbursement quota without jeopardizing their charitable status. With the exception of a few pioneer foundations, the idea hasn’t gained much traction in Canada, in part due to the ambiguity of the guidance and in part due to investment conservatism of Foundation trustees and staff. A few weeks ago, however, CRA released updated and clearer guidance on this topic which, it is hoped, will spur greater flow of capital towards foundations’ charitable mission and vision.

But the onus for financing positive change should not just be on foundations and charitable organizations. Individual and other institutional investors, particularly pension funds, represent sizable pools of investment assets in the capital markets and thereby sizable influence. In the case of individual investors, while current regulations often limit participation by retail investors in new investment styles and opportunities, high net worth individuals (HNWIs), deemed sophisticated enough by virtue of their own investment knowledge or ability to access specialized advice, have tremendous flexibility to deploy their capital in ways that align their financial return needs with their values. With nearly 280,000 HNWIs in Canada – individuals with $1 million or more in investable assets per a 2012 World Wealth Report – and therefore trillions of dollars in total financial capital, even if a small portion of this capital were to be invested in social and environmental causes beyond what is given in donations, the potential for affecting positive change would be huge.

It is also no secret that pension assets represent one of the largest shares of global financial capital. At the end of 2011, global pension assets stood at just over $30 trillion, and Canada, with just over $1.3 trillion of that share (78% of GDP), represented the fourth largest market for these assets2. Isn’t it perverse then that the assets in our pension plans are usually deployed in ways that work against our very own wellbeing? In a 2001 book entitled ‘Working Capital, The Power of Labor’s Pensions’, Tessa Hebb, one of the thought leaders in SRI and sustainable investing, succinctly described this paradox in saying that “the earnings that workers defer for a secure retirement inform financial decisions that, in turn, determine the quality of employment and the character of goods and services they enjoy. Yet the institutions and individuals that manage pension funds often pursue narrow goals whose consequences undermine workers who provide the savings they tend.” In recognition of this, a number of pension plans have begun to invest ethically, while ensuring their adherence to fiduciary duty towards plan members.

There are multiple concepts for doing good and doing well at the same time – be it in the form of responsible investing, sustainable investing, or impact investing. Each of these concepts is based on the tenet that there are investments that have the potential for yielding both financial return and positive impact. Investors can select the concept they wish to pursue based on their investible asset size, preferences and types of investment opportunities available. All we need to do is take action.

1.            Global Philanthropy, Council on Foundations, November 2005

2.            Global Pension Assets Study 2012, Towers Watson, January 2012