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Why a shift to Impact Investing will create big winners and big losers

Roar Growth | Peggy Van de plassche | Mar 8, 2021

SRI Investing outlook - Why a shift to Impact Investing will create big winners and big losersAcross the globe, Covid-19 has brought massive disruption in all areas of our lives, mostly for the worst. One of the positives that came up from the pandemic has been the increased focus on various forms of inequalities and climate change and the need to tackle them with a different approach than the ones that created them, or what some might call Stakeholder Capitalism.

Investments aiming at reducing inequality and climate change fit neatly under the broader category of Sustainable, Responsible, Impact (SRI) investing. We first find mentions of SRI investing in religious traditions dating back to 1,500 BCE, so nothing new under the sun! However, the impact investing philosophy goes nowadays way beyond investments solely focusing on SRI-based business models, such as Cleantech. By taking into consideration SRI results jointly with financial results when allocating capital, investors are now extending impact investing from its original niche to the entire universe of public and private companies.

Still slow-moving pre-Covid-19, the pandemic has fueled a fast-growing interest in impact investing from institutional and retail investors, both in public and private markets. We can make a first parallel between this acceleration and the one we have seen in the technology space with the rapid adoption of digital tools across the globe that was also enabled by the crisis.

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Impact or SRI investing is taking over from Environmental, Social and corporate Governance (ESG) methodology that was developed in previous decades. ESG was criticized for its lack of teeth — loose standards and only accounting for the “good stuff” enabling green washing (making people believe that your company is doing more to protect the environment than it really is). However, with all its flaws, ESG was a necessary step to enable SRI investing… one needs to learn how to walk before running, or in this instance to crawl before to walk.

As an investor, why should you care about Impact Investing? Impact investing is simply the biggest wave you can ride and also the biggest risk you should manage

You should care for multiple reasons, and I will not preach here the goodness of SRI Investing.

As technological innovations have been permeating every industry at an increasing pace since the industrial revolution creating big winners and losers, SRI has been and will be doing the same for the foreseeable future at an ever-faster pace.

We will see an upending of industries with the extinction of some and organizations unable to transform, the creation of new champions, the disruption of the allocation of capital and massive impacts on ROI.

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In the grand scheme of things, these tectonic shifts are still in their infancy but they are definitely real: 1) asset managers call for more sustainable investment, such as:

Blackrock’s Larry Fink, and Canadian Pension Funds;

2) companies, such as Peabody Energy Corp., the biggest US coal producer is warning of potential bankruptcy;

3) capital is reallocated to companies scoring high SRI results, such as Blackstone’s $200M investment in Oatly;

4) PE-VC impact-focused funds are going mainstream, such as Impact Engine, Renewal Funds, Social Impact Capital;

5) multiplication of impact-focused retail investments solutions, such as impact mutual funds, green bonds, ETFs,…;

6) the price of carbon in the world’s biggest, most liquid market is soaring;

7) Stakeholder Capitalism championed by the likes of Klaus Schwab is gaining traction;

8) multiplication of companies aligned with the SRI agenda, such as Impak Finance, Long Game, or FrontFundr in the Fintech space.

These are only a few examples of how impact investing is picking up steam globally across all fields.

In an atypical situation, Europe is way ahead of the impact investing game while Asia is way behind. In North America, with the US having just rejoined the Paris agreement, should catch up to Europe in ~3–5 years assuming their respective levels of engagement stays the same, while Canada is likely to follow in the US footsteps.

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