Scaling Impact Investing: The Role of Institutional Investor Capital
Impact investing continues to gain momentum in the U.S. and abroad, but scaling it has proven difficult. The fact that momentum has not translated into institutional capital reaching critical mass is not surprising. Why? Because at the most basic level, impact investing is challenging the building blocks of capitalism, and its profit motive, as the sole path to maximizing shareholder value. This is the language of fiduciaries and common ground is yet to be reached, but will it ever and does it matter?
A recent piece by Bob Massie in Institutional Investor focusing on ESG (environment, social, governance) criteria for institutional investors provides great insight. He offers a critical set of considerations and arguments that fall under the impact investing umbrella. One of the most powerful sentences in the article:
…”Though no one disputes capitalism’s raw force, the deeper issue is whether the free-market system, hamstrung by the narrow assumptions of economics and finance, has been asking the wrong questions, examining the wrong data, reaching the wrong conclusions and pursuing the wrong goals.”
I have been thinking about this a lot lately. To me, the sentence above is linked to one of Milton Friedman’s most powerful contributions to our collective thinking. If you know Milton Friedman, you must be going “yeah, right” – but read on.
Across asset classes there is growing interest in a panoply of strategies captured by the following terms: impact investing, ESG, social enterprise, profit with purpose, etc. Impact investing has largely attracted capital to pursue illiquid alternative investments, mainly via venture capital strategies. But the amounts deployed are dwarfed by the fact that investable assets around the world surpass $200 trillion. The big question is whether those assets can be focused on impact.
