Impact investing is here to stay: what to expect from 2022

By Amy Domini, Founder, Domini Impact Investments

Amy Domini, Founder, Domini Impact Investments

Impact investing was once a hidden niche – reserved for those that wanted to do good, but understood that it was at the expense of financial returns. With this myth rapidly being upended, and the deadline for achieving the UN’s Sustainable Development Goals less than a decade away, it is clear that impact investing is here to stay. Founder and Chair of Domini Impact Investments, widely regarded as a pioneer of impact investing and one of Time’s 100 Most Influential People, Amy Domini reflects on the journey that the space has embarked upon to date, and what the future holds for it.

Standardisation is clearly a key element to supporting the future growth of the impact investing market. Do you think 2022 will see any significant developments in this aspect?

As investors increasingly begin to understand the benefits of integrating ESG factors into their investment decisions to mitigate risks and uncover opportunities, investor demand for financially relevant ESG information is in more demand than ever. But the lack of consistency, transparency and standardisation among the majority of ESG information providers has presented a persistent obstacle in allowing investors to integrate ESG factors.

Although it is undeniably difficult to define a “healthy workplace” and to place a monetary value on it, it can certainly be done. After all, pharmaceutical companies price the value of less pain; real estate companies price the value of a sunset view. This is not all that different.

This also means that third-party ESG score providers will likely move away from a single total score. While this has the convenience of summaries, it is now largely redundant. 

The natural progression of this is that the definitions of true impact investing will settle into at least broad standards, giving firms and investors a standardised, albeit top-level, understanding when it comes to making decisions around the ESG factors and impact of a potential investment. 

These will likely comprise: 

• Strong fundamentals: does the management company apply standards about improving planetary ecology and providing universal human dignity to the investment decision making process? 
• Active engagement: does the management company go beyond passive alignment and into advocacy on ecology or human dignity by filing shareholder resolutions or engaging actively with the executives working at the investments they make? 
• Inclusive approach: does the management company seek out means to support, with investment or operating funds, those left behind by the “miracle of capitalism?” This can be, for example, the purchase of social bonds or venture capital in support of indigenous communities or a variety of creative means.

While much time and effort has gone into attempting to set bullet-proof rules to avoid greenwashing, the reality is that achieving perfection is a lofty ambition, and incremental change is the most lucrative way forward. Everything helps. The underlying issue when it comes to impact investing and avoiding greenwashing is ascertaining whether the management company is simply using a popular trend as a marketing tool or is actually engaged with efforts to achieve our shared long- term goal of a livable planet inhabited with people who lead lives worth living. The above three standards are fully adequate at separating the true leaders from the pack.

It is also important to note that, as any investor knows, it is possible for two investors to have identical data and draw differing conclusions. There is no invincible method of making an investment decision: a good investment is in the eye of the beholder. That is what makes markets work.

There has been much focus on the ‘E’ element of ‘ESG’ to date, but recent events like Black Lives Matter and COVID-19 have shone a light on the ‘S’ aspects. Do you expect this to continue in the coming year?

George Floyd’s death last May reignited a national debate about racism in the U.S., sparking the proliferation of the Black Lives Matter movement. This quickly expanded into broader conversations about recent immigrants, gender issues, differently abled issues, and a host of other indicators. The lesson is an age-old one: each individual deserves to be treated with dignity and respect, and to be offered opportunity.

Simultaneously, similar conversations have been simmering globally. Japanese companies have had much focus on gender diversity and advancement; a trend also seen among Korean companies with a focus on the rights of those differently gendered. South Africa, meanwhile, has made significant strides when it comes to racial diversity – but less so on other ways people are different. And Canada, Australia, and Brazil face particular scrutiny over indigenous populations. 

COVID-19, initially thought of as the great equaliser, has since revealed itself as the great differentiator – accelerating the widening of the already mammoth gap between the wealthy and the poor when it comes to employment, education, healthcare, housing and a whole host of other opportunities. 

However, there has been little focus on the common ground that each issue shares with another. If counties can identify the commonality between their issues – the need for the empowerment and fair treatment of historically disenfranchised populations – this can be the start of a twenty-year process to collect information, meet with different advocacy groups and determine which indicators might help investors. 

This is a complex issue for investors and far from a “one size fits all” problem. Nonetheless, addressing it is essential to creating peace in our time, requiring the cooperation of corporations, investors, governments and communities. But it has clearly begun, as evidenced by the disclosure of EEO-1 (federally mandated records) to the public, which is now integrated into annual reports in the U.S.

Where do you think impact investing has made the biggest difference?

Impact investing has created a whole new sector – creating and filling the demand for sustainable solutions that solve the world problems. Thirty years ago, there were very few companies that produced something that was good for you and did it extremely thoughtfully. 

Today, in part in response to investor interest, there are hundreds of such companies: they make clothing out of recycled fabrics in humane conditions and with direct benefit to the poor. They create sustainable and innovative solutions to reducing the need for so much energy and are headed by management teams with tremendous diversity. They provide food that is vegan and wholesome while utilizing innovations in robotics and intelligent design to strip away some of the human safety issues food production so often raises. 

We are no longer simply investing in better companies; we are creating a market that encourages entrepreneurs interested in using capital markets to make a better world. And it is the willingness to finance companies that discussed such seemingly irrelevant (from an economic perspective) missions that allows the true enthusiasm of entrepreneurs for making a difference in the world.

Any final thoughts?

A boring but certain fact of the markets, including impact investment markets is this: change will continue.    

Just ten years ago, for example, Exxon Mobil, Chevron and IBM were among the top ten S&P 500 companies. Today none of these three is on the top 25. The changes are the result of a mix of things, but one important component was the fact that millions of individuals took a step. Millions voted to get the planet out of oil dependency. Millions flocked to the individualised time-saving opportunities that the new technology companies provided. 

There are emerging concepts, and emerging companies, that will alter the current order. Over time, the influence of responsible investors will lead to ever increasing advantages for responsible companies selling safe, useful, and sustainable goods and services.

By Amy Domini, Founder, Domini Impact Investments

Amy Domini, Founder, Domini Impact Investments

Impact investing was once a hidden niche – reserved for those that wanted to do good, but understood that it was at the expense of financial returns. With this myth rapidly being upended, and the deadline for achieving the UN’s Sustainable Development Goals less than a decade away, it is clear that impact investing is here to stay. Founder and Chair of Domini Impact Investments, widely regarded as a pioneer of impact investing and one of Time’s 100 Most Influential People, Amy Domini reflects on the journey that the space has embarked upon to date, and what the future holds for it.

Standardisation is clearly a key element to supporting the future growth of the impact investing market. Do you think 2022 will see any significant developments in this aspect?

As investors increasingly begin to understand the benefits of integrating ESG factors into their investment decisions to mitigate risks and uncover opportunities, investor demand for financially relevant ESG information is in more demand than ever. But the lack of consistency, transparency and standardisation among the majority of ESG information providers has presented a persistent obstacle in allowing investors to integrate ESG factors.

Although it is undeniably difficult to define a “healthy workplace” and to place a monetary value on it, it can certainly be done. After all, pharmaceutical companies price the value of less pain; real estate companies price the value of a sunset view. This is not all that different.

This also means that third-party ESG score providers will likely move away from a single total score. While this has the convenience of summaries, it is now largely redundant. 

The natural progression of this is that the definitions of true impact investing will settle into at least broad standards, giving firms and investors a standardised, albeit top-level, understanding when it comes to making decisions around the ESG factors and impact of a potential investment. 

These will likely comprise: 

• Strong fundamentals: does the management company apply standards about improving planetary ecology and providing universal human dignity to the investment decision making process? 
• Active engagement: does the management company go beyond passive alignment and into advocacy on ecology or human dignity by filing shareholder resolutions or engaging actively with the executives working at the investments they make? 
• Inclusive approach: does the management company seek out means to support, with investment or operating funds, those left behind by the “miracle of capitalism?” This can be, for example, the purchase of social bonds or venture capital in support of indigenous communities or a variety of creative means.

While much time and effort has gone into attempting to set bullet-proof rules to avoid greenwashing, the reality is that achieving perfection is a lofty ambition, and incremental change is the most lucrative way forward. Everything helps. The underlying issue when it comes to impact investing and avoiding greenwashing is ascertaining whether the management company is simply using a popular trend as a marketing tool or is actually engaged with efforts to achieve our shared long- term goal of a livable planet inhabited with people who lead lives worth living. The above three standards are fully adequate at separating the true leaders from the pack.

It is also important to note that, as any investor knows, it is possible for two investors to have identical data and draw differing conclusions. There is no invincible method of making an investment decision: a good investment is in the eye of the beholder. That is what makes markets work.

There has been much focus on the ‘E’ element of ‘ESG’ to date, but recent events like Black Lives Matter and COVID-19 have shone a light on the ‘S’ aspects. Do you expect this to continue in the coming year?

George Floyd’s death last May reignited a national debate about racism in the U.S., sparking the proliferation of the Black Lives Matter movement. This quickly expanded into broader conversations about recent immigrants, gender issues, differently abled issues, and a host of other indicators. The lesson is an age-old one: each individual deserves to be treated with dignity and respect, and to be offered opportunity.

Simultaneously, similar conversations have been simmering globally. Japanese companies have had much focus on gender diversity and advancement; a trend also seen among Korean companies with a focus on the rights of those differently gendered. South Africa, meanwhile, has made significant strides when it comes to racial diversity – but less so on other ways people are different. And Canada, Australia, and Brazil face particular scrutiny over indigenous populations. 

COVID-19, initially thought of as the great equaliser, has since revealed itself as the great differentiator – accelerating the widening of the already mammoth gap between the wealthy and the poor when it comes to employment, education, healthcare, housing and a whole host of other opportunities. 

However, there has been little focus on the common ground that each issue shares with another. If counties can identify the commonality between their issues – the need for the empowerment and fair treatment of historically disenfranchised populations – this can be the start of a twenty-year process to collect information, meet with different advocacy groups and determine which indicators might help investors. 

This is a complex issue for investors and far from a “one size fits all” problem. Nonetheless, addressing it is essential to creating peace in our time, requiring the cooperation of corporations, investors, governments and communities. But it has clearly begun, as evidenced by the disclosure of EEO-1 (federally mandated records) to the public, which is now integrated into annual reports in the U.S.

Where do you think impact investing has made the biggest difference?

Impact investing has created a whole new sector – creating and filling the demand for sustainable solutions that solve the world problems. Thirty years ago, there were very few companies that produced something that was good for you and did it extremely thoughtfully. 

Today, in part in response to investor interest, there are hundreds of such companies: they make clothing out of recycled fabrics in humane conditions and with direct benefit to the poor. They create sustainable and innovative solutions to reducing the need for so much energy and are headed by management teams with tremendous diversity. They provide food that is vegan and wholesome while utilizing innovations in robotics and intelligent design to strip away some of the human safety issues food production so often raises. 

We are no longer simply investing in better companies; we are creating a market that encourages entrepreneurs interested in using capital markets to make a better world. And it is the willingness to finance companies that discussed such seemingly irrelevant (from an economic perspective) missions that allows the true enthusiasm of entrepreneurs for making a difference in the world.

Any final thoughts?

A boring but certain fact of the markets, including impact investment markets is this: change will continue.    

Just ten years ago, for example, Exxon Mobil, Chevron and IBM were among the top ten S&P 500 companies. Today none of these three is on the top 25. The changes are the result of a mix of things, but one important component was the fact that millions of individuals took a step. Millions voted to get the planet out of oil dependency. Millions flocked to the individualised time-saving opportunities that the new technology companies provided. 

There are emerging concepts, and emerging companies, that will alter the current order. Over time, the influence of responsible investors will lead to ever increasing advantages for responsible companies selling safe, useful, and sustainable goods and services.