Investors Increasingly Use Their Dollars to Create Change

Investing in the future means more than making money for retirement.

Among everyone from millennials – who make up 34% of the workforce and recently became the largest age group employed in the US – to baby boomers, there’s a growing trend of “impact investing”. Practitioners of this method seek to generate not just long-term financial returns but also positive environmental, social and governance (ESG) results. Along with individuals, impact investors include institutions like hospitals, medical schools and religious organizations who view their money as a way to achieve a greater and more purposeful impact.

According to a study by US Trust, a division of Bank of America, 93% of millennials say a company’s social and environmental impact is key to whether they decide to invest in it. This is a natural progression from when they were college students protesting for their universities to divest from fossil fuels or boycotting companies that committed human rights violations. Meanwhile, in 2016, 51% of baby boomers say impact investments are the right place to put their dollars, up from 46% just one year before.

According to a report from the Forum for Sustainable and Responsible Investment, impact investing has grown substantially. Between 2012 and 2014, the number of US-based investments that were managed under a sustainable, responsible and impact investing (SRI) strategy increased by 76%. These assets account for more than one out of every six dollars under professional management in the US.

Investors are moving their money into previously niche industries, such as clean technology and natural food, which had been sustained by venture capitalists and angel investors. Impact investing is also good news for the affordable housing market, whose government subsidies will eventually expire. This space provides new opportunity for impact investors to earn reasonable returns. It’s a win-win for all parties because the investment relationship creates social equity, improved environmental performance and economic growth in the community. Real estate investment trusts (REITs) expect affordable housing to remain in demand, which ensures a predictable cash flow. They’re also looking for triple bottom-line returns: affordable housing, sustainability through environmental upgrades and economic dividends.

Aside from the feel-good benefits of these investments, some clients believe socially responsible investments will help reduce risk. The clean energy sector, for example, is expected to continue to grow in both need and adoption while helping communities lower their impact on climate change. Clean energy use also makes communities more resilient to disruptions and the price volatility of traditional energy use. Investments in the space “have the potential to generate a much wider range of positive outcomes including job creation, advancing science and technology, stewarding natural resources and protecting public health”, according to a report by the Prime Coalition, the Stanford Steyer-Taylor Center for Energy Policy and Finance, and the Massachusetts Institute of Technology (MIT) Sloan School of Management.

The trend toward impact investing is also leading to new models that capitalize on the power of entrepreneurs and capital markets to drive social change. A case study in the Harvard Business Review highlights innovations that link social performance to financial returns, such as social impact bonds. Launched in the US earlier this year, these bonds connect service providers with investors who provide the initial funding for programs; the government agrees to pay back the investment if the program achieves its goals to improve lives. Investors, then, can reap both social and financial returns.

It’s all good news for major corporations that are already innovating their businesses to create a better environment and more inclusive economies. “We view sustainability as a business approach that creates long-term stakeholder value,” says David Tulauskas, General Motors’ director of sustainability. “We’re seeing increased interest from key investors on our sustainability performance. They want to know we are resilient, can adapt to changing customer preferences and can reduce risks related to climate change.”

GM has created new revenue streams from business models that address sustainability issues: its Maven car sharing brand, for example, as well as a manufacturing philosophy that treats waste as a resource out of place. In recent years, GM has generated up to $1bn in revenue from recycling and reusing its own byproducts.

Judith Rodin, the president of the Rockefeller Foundation, offers this advice to companies that are looking to attract impact investors: “When you do what’s right for your long-term success by doing more good for the world, investors won’t just give you permission – they’ll reward you.”

Reposted from TheGuardian.com/General-Motors-Partner-Zone with permission.