In recent years, there has been a quiet revolution taking shape across our economy. A growing movement led by passionate pioneers out to change the world has been slowly but surely expanding. A growing chorus of fearless leaders have been championing the idea that businesses can be a powerful tool for social good, beyond the jobs that they create, while also retaining a focus on profit and growth. And the markets have responded. Some might call this revolution a form of Capitalism 2.0, as it represents a new class of investors and business builders and entrepreneurs who are locking arms and building a new economy wherein companies bring forward products and services that address daunting social challenges, while at the same time generating compelling financial returns for investors. These companies span many sectors representing large markets such as education, energy, food, transportation and healthcare that are ripe for disruption.
Known as impact investing, this movement has experienced considerable traction and momentum in recent years, with 2018 bringing the total of Assets Under Management (AUM) in this category to over half a trillion dollars. The year-over-year growth rate shows great promise, as well, with the total AUM rising from $114 billion in 2016 to $228 billion in 2017 to $502 billion in 2018.
If this growth trend continues, it suggests that impact investing is on a track to hit a trillion dollars in the near future — taking impact investing out of a nascent, early days phenomena to a movement heading toward the mainstream.
Traditional financial institutions are jumping in
It wasn’t that long ago that the impact investing sector was seen as outside the financial mainstream, and, in truth, it was to some extent. But in recent years, traditional financial sector players have been jumping in at an impressive rate. Today, the impact investing movement comprises a growing list of traditional banks and investment firms, including the world’s largest asset management firm, BlackRock, joined by Bain Capital, Goldman Sachs, JP Morgan, Morgan Stanley, Citibank, Bank of America and TPG, just to name a few. Taken together, the potential scale and influence of these firms signals a bright future for the impact investing.
A new kind of company, a new kind of capitalism
There is a growing and robust community of entrepreneurs and business leaders driving this global movement of business as a force for good. From the creation of a new legal status, the Benefit Corporation, to a much broader movement of companies who commit to intentionality, measurement and transparency around social and environmental impacts, these new classes of companies are ushering in a new era of businesses committed to positive impact, and with it a new kind of capitalism.
The innovation many of these young companies are bringing forward is getting the attention of business media with many features in Forbes, Fast Company, Financial Times, Fortune, Inc and the Wall Street Journal, to name a few. B Corps and impact companies have consistently populated Fast Company’s Most Innovative Companies annual list, with Warby Parker and Revolution Foods taking top spots. And while most know the Warby Parker brand for their hip eyeglasses, lesser understood has been the positive social impacts of their success — the company recently announced that it has provided more than 5 million pairs of eyeglasses to those in need through their buy-a-pair-give-a-pair program, while at the same time achieving a coveted status of any young company — joining the ranks of rare successful startups whose value exceeds $1 billion.
And the positive impact of B-Labs work can also be seen in more and more companies embracing the impact investing ethos. Numerous companies have used B-Lab’s protocols to test their opportunities to build inclusivity and sustainability into their corporate plans. And some large companies have gone a step further and sought B Corp Certification for key subsidiaries. Just last year, Danone USA announced that they are now a certified B Corp, bringing the total certified Danone subsidiaries to 8, including the leading U.S. organic baby food brand Happy Family. The company has also announced a commitment to be the first multinational food company to have all operations certified worldwide showing large multinationals can embrace social mission alongside continuing to scale and focus on financial returns.
In 2015, I wrote about the initial growth of the burgeoning field, calling it “A New Inning for Impact Investing.” We’ve made a lot of progress since then. The market has created an impressive ecosystem of organizations that are committed to Impact Investing and all are seeing the impact of more women and millennials coming on board and using their growing financial power to favor companies and brands that are “good actors.” In fact, I would argue that, while it is still early days in the history of impact investing, in our trek to a trillion, a tipping point may now be in sight. To come back to the baseball metaphor, we are at the 7th-inning stretch on this march.
Yet, as the movement is poised to cross the trillion-dollar mark and continue to mature, some key hurdles will need to be overcome. In particular, impact investing needs to more fully embrace measurement, data and transparency. On measurement: standards need to develop to more clearly and consistently measure the true impacts of investing with intention. There is progress on this front, including a collaboration called the Impact Management Project, and a “data lab” of sorts by TPG Rise Fund called Y Analytics, to name a few. And in the areas of data and transparency, while narratives on the benefits of impact investing are compelling and helpful, as the movement seeks to put trillions of dollars to work to deliver both social and financial returns, investors, entrepreneurs and analysts require accessible and reliable data that demonstrates the breadth of the field, including the return and impact spectrum that it offers. Without this, the transparency that allows financial markets to blossom and that gives investors confidence will slow the adoption of impact investing. One could ultimately see the same kind of investing tools investors take comfort from that serve to help them analyze investing opportunities more broadly, such as ratings systems or analysts who specialize in reporting on key areas, being deployed around impact.
Impact investing has come a long way. More and more entrepreneurs, companies and investors are coming together looking for both financial and social returns and the growth of the sector and the diversity of investors who are committed to impact investing is impressive. Yet, to continue moving impact investing from niche to the mainstream, we need to double down on advancing development of measurement, data and transparency, and look to some industry wide commitments to ensure the integrity and longevity of this important movement.