Opinion
Impact Investing is Going Mainstream
How the motivation of generating social or environmental impacts is diversifying traditional investment strategies
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That’s the message the Ford Foundation communicated earlier this year when it announced that $1 billion of its $12 billion corpus would be devoted to mission-related investing. A significant chunk of the Foundation’s existing investment portfolio will be deployed over time into funds seeking to earn not only attractive financial returns but also concrete social returns. By doing so, the Ford Foundation seeks to align its investments with its mission to reduce poverty and injustice.
Allan (Chanoch) Barkat. Photo: Israel Hadari
Ford’s decision represents a major shift in attitudes toward impact investing and the place of social enterprise in the strategic creation of investment portfolios. Those of us involved in the impact investing field have already seen that aligning our investment strategies with social values can indeed benefit the financial bottom line, as well as move the needle on societal improvement. Yet while billions, even trillions of dollars are beginning to make their way into impact investing portfolios, the many categories of social investing need to be considered.
More and more investors are looking to manage their investment portfolio according to their interests and values, regardless of financial considerations. Sometimes, this first step is known as negative streaming. With this approach, investors won’t invest in oil companies if they believe in renewable energy, no matter how strong the companies’ financial profile may be.
Another type of investment strategy incorporates environmental, social, and governance (ESG) considerations into investment decisions. Its objectives are to achieve a positive environmental or social impact alongside positive financial returns and align investments with personal values.
Yet another group of impact investors explicitly aim to make a measurable positive environmental or social impact through the capital invested. It requires financial innovation because it requires thinking out of the box— these are situations where the financial return is not the sole concern, but rather the social impact is a targeted outcome. Clearly, the key issue this industry is facing relates to the question of meeting market returns without compromising on social returns.
In 2018, we will see continued growth in portfolios that are adding more impact parameters to their mission statements. Even in Israel, the industry has reached an inflection point with new opportunities for impact investing and the growth of social businesses. For this to become mainstream, the ecosystem will have to evolve quickly, ensuring that more investors and fund managers focus on impact investment, and the regulatory environment will encourage institutional investors to incorporate their investments with social impact criteria.
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The Israeli regulators are showing initial signs of support for this agenda. Earlier this month, Israel’s Commissioner of Capital Markets Dorit Salinger announced that institutional investors are now expected to outline within their investment policy statements any aspects of "responsible investments" — investments that take into consideration social aspects alongside financial returns.
Ms. Salinger’s announcement set off a flurry of excited conversations within a growing community of investors who think impact investing represents the future. Can impact investing ensure a market rate of return while doing something good for the world? That will be the test of its durability.
Businessman and entrepreneur Allan (Chanoch) Barkat is the founder of the Dualis Social Investment Fund, a venture capital firm that invests in socially-oriented businesses. Mr. Barkat was formerly the managing director of the Israeli subsidiary of Apax Partners Worldwide LLP, one of the worlds’ leading private equity investment groups.
