What is “responsible investment”?
Responsible investment refers to investments that include some consideration of social or environmental impacts, with the expectation of some financial returns. From targeted place-based community development to shareholder engagement and microfinance, there are many different kinds of investment strategies across asset classes that take into account social and environmental outcomes. One of our first publications was brief piece that looked at investments with impact across asset classes.
Impact investing is the most popular term for this kind of activity today, and many have ascribed varying levels of specificity to what counts as an impact investment. From the IRI’s perspective, impact investment is the most recent in a long line of terms used to refer to an investment approach that considers more than traditional finance metrics.
But I thought impact investing and socially responsible investing weren’t the same thing?
That depends on who you talk to—definitionally, impact investing has tended to focus on intentionality and direct private equity investments, whereas socially responsible investing is perceived to be negative screening in public equities. We don’t find those to be particularly helpful distinctions.
We think it’s useful to think about two broadly different types of motivations behind investors looking at impact and responsible investment: risk mitigation and social good. These differing motivations have important outcomes on the risk/return tolerance of investors and the kinds of scale and product they might be interest in.
- Risk mitigators tend to be larger institutional investors interested in how environmental, social, and governance considerations at a portfolio-level might help them deal with long-term issues like climate change or inequality. They tend to require a certain scale of product and market-rate returns, and see this work as an effort to reduce risks to their portfolios.
- Social good investors see finance and investment as a tool to achieve certain outcomes. These investors are often foundations or high net worth individuals who are willing to invest in a riskier, or lower-return product if the social impact story is particularly compelling.
How do I measure impact?
How big is the market?
This is a rapidly changing field, with wide discrepancies on what should or shouldn’t count, and no standardized information sharing and reporting process for tracking responsible investments at a market level.
But! Here are some numbers that people have come up with, with caveats that methodology is incredibly challenging and these are mostly useful as thumbnail sketches:
- $45 trillion: AUM of signatories (global asset owners and managers) to the UN PRI www.unpri.org
- $21.4 trillion: social investment in the US, Canada, Europe, Asia (minus Japan), Japan, and Australia, as collected by social investment trade associations. Global Sustainable Investment Alliance (GSIA)
- $6.57 trillion: total AUM in the US invested in sustainable investing, as measured by USSIF and the Croatan Institute 2014 Report on Sustainable and Responsible Investing Trends
- $12.7 billion: expected impact investment globally in 2014 by 125 investors surveyed by JPMorgan and the GIIN Spotlight on the Market
- over $1 billion: total amount of deals listed on the Mission Investors Exchange database since 2010 Mission Investment Database
Where can I learn more?
- UNPRI: http://www.unpri.org/introducing-responsible-investment/
- The GIIN: http://www.thegiin.org/cgi-bin/iowa/resources/about/index.html
- USSIF: http://www.ussif.org/sribasics
- Mission Investors Exchange: https://www.missioninvestors.org/mission-investing
- MaRS Centre for Impact Investing: http://impactinvesting.marsdd.com/knowledge-hub/