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How impact changes investing

Eric Rice, Head of Impact Investing within BlackRock Fundamental Equities talked to Sir Ronald Cohen, the highly regarded ‘father of impact investing’ and author of the new book Impact: Reshaping Capitalism to Drive Real Change. Their conversation covered the forces driving impact and how this style of investing is upending the traditional risk/return equation.

The new maths

As companies are increasingly measured not only on the money they make but also on their societal impact, a major shift is underway. Rather than judging by risk and return alone, investors are looking at risk, return and impact.

Let’s take two examples of how investors can do this: measuring companies by the impact they are having towards the achievement of the 17 United Nations Sustainable Development Goals; and measuring the impact they have on the progress towards the Paris Climate Agreement to limit global warming to well below 2°C. Eric Rice says that trillions of extra dollars in investment is needed to achieve these two goals – and that public-market participation will be critical in achieving it.

The myth of lower returns

One narrative that never seems to die – according to Eric Rice – is that this is a philanthropic mode of investing that neglects the fiduciary obligation to maximise returns. “This myth is now being exploded, ”says Sir Ronald, noting that some electric-vehicle companies are attracting lofty valuations while some big oil companies have lost significant value over the past few years. “There are a lot of reasons why risk/return/impact should deliver better returns than just risk/return optimisation.” For example, a company with a great product that does environmental harm, or uses child labour, could face consumer boycotts and sterner regulations, weighing on its profitability.

“This impact revolution is going to be as widespread and as deep as the tech revolution which has preceded it.” Sir Ronald Cohen

Three forces driving change

Sir Ronald, who is also featured in BlackRock’s Global Impact Annual Report, has been an impact investor for decades. But now, he says, there are three forces driving rapid change:

  1. The shifting values of consumers
  2. Technological innovation such as machine learning
  3. The ability to harness computing power to analyse vast data sets and measure the impact of companies

Many companies are embracing this change in a ‘race to the top’. And where there is resistance, investors can engage with companies to drive change.

“I think investors are certainly the ones driving companies now to look carefully at their impacts and judge whether their impact performance is likely to affect their future profitability,” says Sir Ronald. Eric Rice agrees: “I think impact engagement – real engagement with those public companies to make sure they know what’s going to be required of them – is an important new stage for us”.

The future of impact investing

Sir Ronald sees companies’ voluntary embrace of impact measurement becoming mandatory over the next five years. Bringing impact transparency to public equities would be a game-changer, he says, as companies are required to show the impact they are having on the environment, diversity, gender equality and other social issues. Companies may have to publish transition plans or risk losing investors.

Read more articles from BlackRock here


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