Institutional investors run the risk of underperforming in the long run by overlooking non-financial data in their investment decision-making, said a report issued Tuesday by the World Economic Forum, encouraging investors to consider moving to impact investing, combining the promotion of social good with financial reward.
The report is titled “Charting the Course: How Mainstream Investors Can Design Visionary and Pragmatic Impact Investing Strategies.” It underscores “the growing recognition of a need for new ways of thinking” among mainstream investors, the report said.
“Moreover, with exogenous trends such as population growth, rising inequality, climate change and resource scarcity gradually affecting investment markets, impact investing offers a progressive approach to mitigating risk,” said the 56-page report, prepared in collaboration with Deloitte Touche Tohmatsu.
The report provides a road map for asset owners and other institutional investors to evaluate a move to impact investing.
Its recommendations include taking a “no one-size-fits-all approach. To navigate the complexity of impact investing, investors should define an approach that suits their motivations and unique context.
In addition, it recommends working “with and around challenges, recognize and acknowledge challenges, determine which ones are show-stoppers and which ones can be creatively addressed.”
“While impact investing continues to gain momentum, the sector remains small in the context of global assets under management and faces systemic challenges, such as lack of standardized metrics for social impact and the long investment horizons often needed to prove the model,” the report said.
The report cites several estimates of assets under management using some form of impact investing. Among the figures, an estimated 21.8% of total managed assets worldwide “employ some form of sustainable investment strategy,” the report said.
Integration of environmental, social and governance factors in investment management grew to $3.3 trillion in the U.S. as of 2012, up from $166 billion in 1995.
In Europe, ESG integration grew to €3.2 trillion ($4.2 trillion) in 2011 from about €600 billion in 2005.
The World Economic Forum — an independent international organization made up of more than 1,000 top corporations — promotes private-private cooperation for economic and social improvement.