Last month, US SIF, once known as the Social Investment Forum, released its latest biennial trends report on impact investment. The authors enthuse that “investors are considering environmental, social and governance (ESG) factors across $17 trillion of professionally managed assets, a 42 percent increase since 2018.…They are seeking opportunities to support companies and products that advance environmental and social issues, including investing in community banks and credit unions.”
Of course, financial reports often contain big numbers with little context. Is $17 trillion a lot or a little? Well, it turns out that $17 trillion (to be precise, $17.1 trillion) is 33 percent of the total of roughly $51.4 trillion in assets managed by professional firms in the United States. So, $17 trillion doesn’t just sound like a lot; it is a lot.
Yet another report, this one published by three nonprofit advocacy groups—Bargaining for the Common Good, the Institute for Policy Studies, and United for Respect—and released just two days after the US SIF report, paints a very different picture. This report, with the title Billionaire Wealth versus Community Health, was recently covered by NPQ and finds that 647 billionaires have seen their net worth collectively climb by $960 billion during the pandemic. (This number has since been revised upward; with recent stock market gains, the wealth gain currently sits at over $1 trillion, although of course stock numbers can fluctuate both up and down).
Meanwhile, as the Washington Post pointed out in August, while people earning over $32 an hour (about $64,000 on an annualized basis) had fully recovered from the pandemic economic shutdown financially and had higher employment by June 2020 than January, about 18 percent of those earning less than $20 an hour (about $40,000 on an annualized basis) in early 2020 were still unemployed. In other words, the bottom half of wage earners in the US remained in an economic depression.
In short, if impact investing is having positive real-world economic impact, it would seem, at least when it comes to equality, that those effects are being drowned out by a shift of the economy as a whole in the opposite direction.
To be fair, while the USS IF report was released in November, the data are from 2019. But there is no reason to think that impact investing numbers have fallen in 2020, and every reason to believe they have grown. More significantly, the long trend has been a rapid increase in impact investment, even as income and wealth inequality have accelerated. The USS IF report shows that impact investment (then socially responsible investment) totaled $639 billion in 1995, had grown sixfold to $4 trillion by 2012, and has quadrupled in the last eight years to $17 trillion.
Meanwhile, according to Goldman Sachs, as the Financial Post reports, the share of stock in public and private companies owned by the top one percent has increased from 46 percent to 56 percent since 1990. As of fall 2019, the bottom 90 percent of households in the US owned only 12 percent of all stock shares.
Which leaves us with a critical question: If impact investment promotes equity, why has such a large shift in investment practice toward impact investing meant so little?
As with philanthropy, a quick look under the hood provides a lot of answers. Take Domini, a firm that for decades has been widely praised as an impact investing leader. So, where does your money go if you invest it in Domini’s Impact Equity Fund?
Well, according to the fund’s term sheet (as of the end of last quarter), more than a third (35 percent) of the fund is invested in 10 companies, which are (in order of percentage of stock) Apple, Microsoft, Amazon, Alphabet [Google], Proctor & Gamble, Tesla, Nvidia, Home Depot, Mastercard, and Verizon.
One could ask why a particular firm—say, for example, Amazon, widely derided for its poor treatment of warehouse workers, as well as for its tendency to milk state and local governments for tax subsidies—makes the list.
Now it should be noted that Facebook, one of the Big Four, did not make Domini’s list. That exclusion is surely no accident. But this tells you a lot about why impact investment, at least as conventionally practiced, is so limited. You can vote against Facebook, but maybe not Amazon. Lesser-of-two-evils politics, meet your cousin: lesser-of-evils stock investing.
When you realize that a leading impact investing intermediary puts six percent of its dollars from one of its funds into Amazon, and that those dollars count towards that seemingly impressive $17.1 trillion “impact investing” figure, it starts to become clearer why impact investment can so often be ineffectual.
Consider, too, that this is Domini. If this is how a firm that helped create the field constitutes its fund, do we believe that mainstream investing firms (Merrill Lynch, etc.) are more rigorous in their impact funds of more recent origin? Of course not.
Now, to be sure, firms like Domini can and do vote the shares they manage to encourage the companies whose stocks their funds hold to improve their practices. Typically, the way this gets expressed in the impact investing world is enforcement of ESG practices—that is, environmental (as in addressing the climate crisis), social (as in addressing issues of inequality), and governance (as in board diversity, for example).
Resolutions on ESG measures are now routinely part of shareholder meetings, and a number of corporate policy concessions have resulted. But again, how much do we believe such interventions alter overall corporate behavior? To pick Amazon as an example once more, this week the firm agreed to spend $500 million on $300 bonuses to frontline workers; meanwhile, Amazon CEO Jeff Bezos alone has seen his wealth increase by $70 billion this year, or 140 times as much as the cost of those bonuses.
In short, those who are fortunate enough to have stock portfolios can choose to keep Facebook out of them. That might restrain some bad practices of Facebook, but it would require some pretty heroic assumptions about industry-wide firm behavior to suggest that such investor decisions will noticeably shift the economy in the direction of greater equity. So, what would be sufficient to make a difference?
Can Reforms Enable Impact Investing to Achieve Its Promise?
Earlier this year, I spoke with Fran Seegull, who is executive director of the US Impact Investing Alliance and project director at the Tipping Point Fund on Impact Investing, a $14.2 million funder collaborative that support research and policy advocacy that aims to improve impact investing practice and effectiveness. Seegull acknowledges many of the field’s shortcomings. Citing the work of Anand Giridharadas, Seegull concedes that some of the critiques of impact investment are valid and adds that often impact investment amounts to tinkering “around the edges of a broken system.”
Seegull, of course, is an impact investing advocate. Recognizing the field’s shortcomings, Seegull says the Alliance she leads is exploring these issues. She cites the need to address “fundamental questions of what constitutes value, how is wealth created, for whom, and how.” She notes that a key impact investing conundrum is the field’s recognition that “all investments have an impact and it’s opaque.” Part of the goal of the impact investment movement, she adds, “is to make economic and social environmental impacts transparent. I believe there is a phantom balance sheet for every corporation.” Seegull adds that this evasion of corporate responsibility (with social problems kept “off balance sheet”) cannot be allowed to stand “in a world of vast inequality.”
Seegull calls for heightened accountability, especially making sure that corporate pledges made this year in response to the national racial justice uprising are enacted. How to get there, however, remains a work in progress. Seegull says the Alliance is focusing its advocacy in two areas: “Accelerating a transition to stakeholder capitalism and a stakeholder economy. Diversity in the boardroom is part of that piece. The other is community revitalization and the role of community investment.”
Regarding this latter point, the Alliance has supported community development financial institutions (CDFIs), which, according to the latest Trends report now have $266 billion in assets—again, that’s quadruple the level of eight years before. As NPQ has noted, CDFIs played an outsized role in supporting business owners of color amid the pandemic.
Still, even if corporate boards become more diverse and CDFIs become stronger, stakeholder capitalism has its limits. Just exactly how much firms can become accountable to external stakeholders if they remain governed by shareholder boards seems highly questionable. It is hard to imagine meaningful accountability within a system predicated on the notion of one-dollar-one-vote.
As noted above, according to Goldman, the wealthiest one percent own 56 percent of all publicly listed and private company stock, giving an elite group a dominant vote in many, if not most, firms. Perhaps such investors will encourage environmentally sustainable business practices, but will a group that gains outsized benefits from the system as it functions today really act to rein in its golden goose?
Last summer, I also spoke with Angela Barbash, who leads an investing firm in Ypsilanti, Michigan called Revalue. Barbash seeks to distinguish her work from impact investing by calling it “regenerative investing,” which focuses not on a “lesser of evils” picking of stocks, but rather on positively targeted local investments. Barbash concedes that the availability of the type of investing she does remains limited; she estimates there may be as few as 15 such firms nationally.
For Barbash, buying local is important, but it is just one screen of many. Her impact due diligence goes far deeper than that. As Barbash details, among the questions she asks are, “What else are they doing to create return on investment. Are they hiring people who have a hard time getting jobs? Are they re-localizing a supply chain?” As Barbash notes, “Just placing money locally is not good enough—governance, internal corporate culture, and association with the broader world around it” are all important.
“White wealth,” Barbash points out, “has to be part of the conversation. What we’ve seen with ESG, it becomes whitewashing.” She expects “pushing against power structures is going to continue until there is a genuine shift of power and wealth. They have to be at the table as willing participants.”
Technical Fix or Value Shift?
In October, SOCAP (Social Capital Markets) held its annual conference. (Virtually, of course, because of COVID-19.) At the conference, there was an acknowledgement, as Sir Ronald Cohen put it in a “main stage” conversation with Ford Foundation president Darren Walker, that “we have a system that exacerbates the inequity and environmental damage” and we are “throwing money at old ways of doing things that just don’t work.”
The lure of the technical fix loomed large. The attraction is obvious. Even if many don’t know how it is calculated, reports on the Dow Jones Industrial Average are visible everywhere. What if there were a similar impact index?
As Walker put it, “The challenge will be how to have companies and asset managers adopt what needs to be a single analysis of the issue of impact. There are literally now a dozen different measures.… We’re going to have to come together to build some consensus because otherwise the companies will forum shop to get the consultant or framework that gives them the best grade.”
Of course, one reason why there are a dozen different impact measures is because they measure a dozen different things. Developing a consensus composite “impact” measure is inordinately complex and might be less of a game-changer than some think.
To be fair, Walker also calls for a value shift that rejects maximizing shareholder value (based on the theories of economist Milton Friedman) and prioritizes what Seegull called a “stakeholder economy.” In some ways, this approach is a call to return to mid-20th century stakeholder capitalism, in which large corporate managers sought sufficient profits while (at least in theory) also addressing worker and community values. Once, Herbert Simon won the Nobel Prize in economics for his work describing what he famously called “satisficing” firm behavior.
Cohen, too, acknowledged the need for a change in values. Cohen even goes so far as to state, “I am putting all of my faith in the change of values.” Cohen adds that, “We should be doing good and doing well at the same time.”
This sounds good, but Cohen actually identifies a core weakness of impact investing—specifically, a shyness around identifying elements of power, conflict, and choice. Yes, impact investing identifies a core truth about the economy—namely, that economic investments have social and environmental impacts, both for good and for ill. So, changing the bases by which investors make investing decisions can indeed change what some of those social and environmental impacts are.
That much is true. But what is also true is that sometimes doing good requires doing less well. And it is also a mistake to assume that changing corporate incentives and values—helpful though such changes would be—is all that is required.
To name one issue, perhaps the current division of authority among public, for-profit, and nonprofit actors must be reconsidered. Or perhaps the nature of the firm itself needs change—certainly, those who call for the expansion of worker cooperatives like to think so. And it is obvious that the current distribution of wealth (and relatedly, power) is not sustainable. Even if all assets were managed with impact criteria in mind, there is little reason to expect that impact investing alone would change that, especially if those who “do good” continue to also “do well.”
Another session at SOCAP tried to address some of these challenges. The session was labelled the “Developing Nature of the Social Entrepreneurial State.” It is notable there was exactly one main stage session that centered on the relationship of state and economy—and it largely focused on Africa. Still, the session raised some important questions, and perhaps because it focused on places where contemporary nation-states are newer, was more willing to look at broader systemic connections.
One of the panelists, Tuna Willem, who is a corporate sustainability officer from Namibia, a country that has only been independent since 1990, emphasized the need for systems “to be created and recreated and re-envisioned.” Another panelist, Kojo Parris, an investment advisor based in South Africa, called for a reimagining of the relationship between the state and stakeholders.
What is clear is that even as the percentage of assets invested for impact continues to rise, the impact investment “theory of change” remains underdeveloped. No doubt, wealth holders who align their investments with positive social values can have a beneficial impact. But they will not shift wealth and power in the economy on their own.