Finance as a Force for Good
The GIIN’s ambitious and aspirational vision, below, explores the state of today’s financial markets, envisions what tomorrow’s financial markets will look like, and outlines the important role of impact investing in making this vision a reality.
Today’s Financial Markets
The interconnected world of today has a freer flow of both capital and labor across borders and many more economic opportunities for individuals than ever before. In recent decades, the global economic system has pulled hundreds of millions of people out of poverty and generated unprecedented cumulative wealth and prosperity. Yet, global society faces major, even existential threats from the effects of climate change, poverty, and severe inequality. Crises in one part of the world increasingly affect us all.
The very same global financial system that spawned the 2008 Financial Crisis and ensuing Great Recession remains largely intact one decade later. The driving force of investment activity is the primacy of the shareholder. For the large part, investment managers and intermediaries consider it their principal duty to maximize returns for their investors, and they are typically compensated based on their ability to do so.
Despite the focus on short-term shareholder value, many investors have begun, in recent decades, to actively screen out harmful investments. Building on this practice, a growing number of investors are making investments with the central purpose of generating positive impact for people and the planet alongside financial returns. This practice is known as impact investing.
Opportunity abounds to harness this growing momentum and exponentially increase the volume of impact investments, channeling financing toward shared goals for creating a better world.
Tomorrow’s Financial Markets
We aspire to create a world in which financial markets play a central role in driving solutions to the critical threats facing the world today.
In this world:
- It will be considered ‘normal’ to factor social and environmental impact into all types of investment decisions.
- Businesses and investors will hold themselves accountable to multiple sets of stakeholders, including shareholders, employees, customers, suppliers, affected communities, and local and global environments.
- Impact investments will be a viable, taken-for-granted option for every investor, from retail to institutional.
- Executing impact investments will be facilitated by greater transparency, with comprehensible, accessible, and sophisticated standards for measuring and understand impact.
- Financial firms will tie incentives to achieved social and environmental impact.
- Analysts and decision-makers will prioritize long-term performance (both impact and financial), while also addressing urgent, near-term challenges — a requisite ingredient for long-term sustainability.
- The concept of ‘externalities’ will be relegated to history, with finance theory equally well accounting for risk, return, and impact.
The financial markets will then have played a central role in financing solutions to mitigate critical threats previously facing the world. The trajectory and pace of climate change will have been mitigated, poverty will have been reduced, and equality of opportunity will have been expanded to previously marginalized groups.
This vision paints, by design, an aspirational future for financial markets, one towards which we all must drive. Anything less would simply be unsustainable. And while this vision will take time to be fully realized, the decisions we make today and tomorrow are critically important, as what we set in place now will ripple into the future. We must focus our collective sense of urgency to have an impact on all investing.
The Future of Impact Investing
Impact investing has an important role to play in achieving our vision for financial markets. As both a movement and an industry, impact investing can catalyze changes that reshape relationships between people and financial markets.
As a movement, impact investing seeks to foster widespread behavioral change by inspiring people to seek positive impact through their decisions about how they earn, save, spend, and invest their money. As an industry, impact investing is a segment of broader financial markets comprising investors, service providers, and field-builders who actively seek to address critical social and environmental challenges. This industry can accelerate the wider movement by demonstrating its own viability and developing tools and opportunities that encourage new entrants to the market.
Impact Investing in Tomorrow’s Financial Markets:
- All impact investors adhere to key principles of practice, including the measurement, management, and reporting of social and environmental performance.
- All investors — from retail to institutional — have ready access to impact investing opportunities and are widely allocating to them.
- As a result, impact investments represent a meaningful portion of total global investment assets.
- Positive and negative impact is rigorously analyzed and integrated alongside risk and return, using sophisticated tools.
- All businesses with positive impact have access to appropriate types of capital throughout their evolution.
- There is rigorous evidence of the positive impact of impact investments on a wide range of social and environmental problems.
To enable these changes, impact investing needs to see dramatic increases in its scale and effectiveness. The Roadmap is a collective action plan to advance the field in this direction.