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Industry Voices

Commentary: Has impact investing reached a fork in the road?

Slow and steady does not win all races. And this is conspicuously apparent when it comes to fueling solutions to the world's social and environmental challenges. No sooner had the Intergovernmental Panel on Climate Change warned us that a 1.5 degrees Celsius warmer world was slipping out of reach, we had an international climate conference marred by enthusiasm for coal and reluctance from several major powers to fully endorse the 1.5 degrees Celsius report and therefore the urgency of the situation. With each step forward, it seems we take a half step back.

Now in the first months of 2019, we have burned through nearly a third of the time we have to implement the 2015 United Nations Sustainable Development Goals by 2030. Yet, despite progress, we are seeing record forced displacement and inequality. The UN secretary-general has called for $5 trillion to $7 trillion of investment each year to meet the goals, a sum that global philanthropy and government aid is not prepared to meet.

Simply put, we are not moving fast enough on addressing the major problems the world faces. And the results could be catastrophic.

So, despite what the tortoise and the hare may have taught us, there are some races where slow and steady doesn't win. In this case, there is no prize for effort and the consequences of inaction are irreversible.

In the impact investing industry, we can reflect on considerable progress. Our 2018 Annual Impact Investor Survey found that 226 respondents from around the globe managed $228.1 billion of impact investments among them — considerably more participants and capital than previous years. This money is both producing returns for investors and helping to solve social and environmental challenges.

As an industry we can be proud of that achievement. But we cannot become complacent — because it's not enough. Impact investing still operates at the margins of our financial system. The vast majority of the system continues as it has always done: channeling capital to projects that are oblivious to or actively harm environmental and social progress, that fuel inequities and cavalier business behavior. That system isn't working. It isn't serving the planet. It isn't serving the people. And frankly, it isn't serving many investors either.

A fork in the road

So what happens now? I see two possible paths ahead for impact investors.

Path one sees us falter and lose momentum. Funding still flows, deals are still done, but growth slows and impact investing remains niche. The pockets of impact we create would be worthwhile, but impact investors will have failed to create change at meaningful scale. It's an easy path to take, but it leads us somewhere we can't afford to go.

Path two, on the other hand, will be much harder than the first. Its destination is nothing less than a transformation of the financial markets. In this path, impact investment continues to grow and helps bridge the resourcing gap for the SDGs and climate change. But it does more, too.

If we stick to this second path, impact investment will raise the bar for all investments; it will establish a new way of doing business. It will create a world where every investment accounts for social and environmental impact. This means enacting a fundamental mindset shift toward the role of capital in society — and not wasting anymore time in doing so.

How we can do it? Can we do it?

In many respects, the odds are against us. There are powerful vested interests who profit from the status quo and will do everything they can to resist change. And no one should underestimate the power of inertia. It is so much easier to continue as we always have until it's too late, to remain blind to the evidence — a hurricane here, crop failures there — that slowly accumulates in headlines about far-flung places while our own lives continue much as they always have.

We won't succeed by pointing out problems and calling for solutions. We can only succeed by building and offering a better alternative to the current financial system. Daunting as that may sound, progress is possible. To start, we should focus on three things:

1. Mobilizing more capital

Simply put, we need to attract more capital to impact investing. This is for two reasons: first, more money invested in impact means more positive change. Second, if we expect the broader financial system to look to impact investment for leadership, we need to grow the industry's size and further establish its performance track record.

Fortunately, this is possible. Impact investing was once mainly driven by pioneering foundations and high-net-worth individuals as an adjunct to philanthropic work. Now, investor demands are changing and institutions are changing with them. Now we see the world's biggest investment banks and institutional investors seize the initiative. Now we see report after report showing us the public's growing appetite for investments that create positive change — especially among women and millennials, who will drive a growing portion of tomorrow's investment industry.

2. Safeguarding integrity

We cannot let impact investing become a victim of its own success. As the sector's popularity grows, there will be some who put an impact label on financial products that don't deserve it. Some may do so on purpose to profit from the "brand," others simply through misunderstanding of what truly constitutes impact.

If we let "impact washing" become widespread, the concept will be diluted and the whole sector will suffer from the ensuing skepticism.

To protect against this, we need to establish rigorous values and standards for impact investors to ensure that the impacts are significant and genuine. Efforts are underway on this front, but there is much left to do to ensure we achieve impact at scale, not just capital at scale.

3. Creating a movement

Ultimately, societal-level change will only come from a societywide shift in thinking. We need a global impact investing movement that demands more responsibility from our financial system and sees capital as something that can change the world, not just change hands.

It won't be enough to just offer impact investment products and hope that interested investors find them. We need to empower every person with the knowledge that their capital can build a better world. We need end investors demanding access to impact options for their savings and their pensions.

It won't be easy, but each of these tasks is possible. They will take a great amount of effort and energy from a great number of people, but it will be worth it. The payoff is a new, responsible financial system that protects and enriches our environment, society and lives. The alternative is unthinkable but worryingly likely. Transformative change requires deliberate, focused, coordinated action from visionaries committed to a new future. And we have to make it faster than ever — because slow and steady will not win this race.

Amit Bouri is CEO of the Global Impact Investing Network and is based in New York. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.