Rising impact investing shows that doing well and doing well can work together: Vikram Gandhi, Harvard Business School
What is the heart of your research?
My research focuses on integrating sustainability and impact into the investment process of large pools of capital, including pension plans, endowments, family offices and individual investors. Historically, investors have looked at the risk-adjusted returns of potential investments. But now, especially for long-term investors, it’s critical to build sustainability and impact into the investment equation. My research focuses on best practices to achieve this, ways to measure sustainability and impact, and methods to integrate them into corporate strategy to create long-term shareholder value.
What are the most important trends shaping impact investing today?
Socially responsible investing has actually been around for quite some time – we’ve seen companies divesting shares with companies doing business with South Africa during apartheid. The big California pension plans have divested tobacco stocks over the past two decades. Now there is impact investing, more geared towards private markets, because as a private investor you have greater ownership and a greater ability to translate a company’s actions into specific impacts. This movement began in 2007 when the Rockefeller Foundation, Kellogg, and other foundations began exploring a for-profit goal of creating more sustainable and scalable businesses with social returns. Many funds, typically $ 30 million to $ 50 million, have been created with a combined goal of impact and financial performance.
Over the past five years, this movement has really taken shape, driven in part by the United Nations Sustainable Development Goals (SDGs). Several analyzes have estimated that $ 7 trillion is needed to achieve the SDGs. Governments and philanthropy could cover half – there was a need to bring in private capital that could seek returns while generating social impact.
Another interesting trend concerns the differences between age groups. In our research, we found that when asked if they cared about impact investing in their portfolios, 25% of Baby Boomers and 35% of Gen X investors said yes, but up to 70% of millennials said yes. The younger generations firmly believe that doing good and doing well can work together. This is very important because over the next two decades there will be a $ 40 trillion transfer of wealth from baby boomers to their children. These young people have a different mindset, which drives the momentum towards impact investing.
Over the past few years, this has increased by 100% per year. People are talking about $ 40 trillion having an ESG impact – that number is only going to grow. Investors want to invest in companies that share their values. But there’s also value for asset owners here – pension plans, endowments, and family offices are the biggest pools of capital. They have a long time horizon that spans decades. If they don’t integrate ESG into their investment process, from a risk management perspective, it’s a bad decision.
Is there a clear link between ESG and a company’s own growth?
Governance, which is part of ESG, has created or destroyed value in companies – poor governance has led to a significant number of company failures. There is enough correlation between good governance and the successful creation of shareholders. From an environmental and social perspective in ESG, there are four to five main factors that matter to every business, depending on the industry. The ES issues encountered by a real estate company are very different from those encountered by an IT company, an oil and gas company or a bank. Ten years ago, the Sustainability Accounting Standards Board (SASB) was established and emphasized that companies should focus on their own ESG metrics, creating a roadmap for different industries.
At Harvard, we mapped publicly traded companies based on ESG metrics specific to their needs. this.
The world economy finds itself between two crises: the pandemic and climate change. What defines effective corporate leadership today?
The pandemic was about dealing with the crisis immediately, keeping your business intact, caring for your employees, customers and community, motivating workers, and protecting investors. It was a time when stakeholder capitalism really emerged, with multiple companies expanding their areas of concern and care.
Climate change poses an even greater urgency, but it reflects a classic problem of collective action because it spans decades and few people want to take responsibility. Yet the pandemic has highlighted the enormity of the climate crisis, also highlighting how no vaccine or distancing can avoid it. Therefore, we see the centrality of climate issues in the current session of the United Nations General Assembly in New York.
Effective corporate leadership must accept that climate impacts are inevitable and that if they are long term, so too are a company’s shareholders. Many CEOs are announcing goals like net zero by 2050, but senior management should also craft realistic five-year plans that methodically lead to that goal.