Impact Investing: History & Opportunity

January 2017
Athena Capital Advisors LLC
Innovation in the financial services industry has not always been a force for good. Americans are by now familiar with the story of the sub-prime mortgage industry and the novel securitization strategies that contributed to the financial crisis of 2008. Yet alongside the scandals, a more positive form of financial innovation has emerged. Variously referred to as sustainable, ethical, responsible or impact investing, an increasing number of investors are employing strategies that look beyond the quarterly, or even annual financial results of their portfolios. Their interests extend to the long-term economic, social, and environmental impact of the companies they help to finance.
One barometer of this activity is the United Nations (UN) Principles for Responsible Investment (PRI), an association of institutional signatories that have committed to consider environmental, social, and governance issues in their investment processes. As of April 2016, the UN PRI had 1,500 signatories with $62 trillion of assets under management (AUM), up from just 100 signatories and $6.5 trillion of AUM at the organization’s founding in 2006.1 As interest in this new approach to investing has grown, asset managers have responded with an increasing number and variety of strategies designed to meet the demand. Investors can today deploy capital across a spectrum of investment products, in nearly every asset class, and build diversified portfolios that align with their values, if not promote them.
The challenge is to sort through all the opportunities, many of which are new and have limited experience. Impact Investing: History and Opportunity reviews the sometimes confusing terminology that proponents and practitioners of this new investment approach use and then introduces various strategies that are available across asset classes. It is most relevant for institutional-scale investors with comprehensive, multi-asset class portfolios. A companion piece to this paper, to be published separately, will focus on the investment process – how investors can draw from the opportunity set described here and successfully navigate the challenge of building diversified portfolios that balance the sometimes competing objectives of maximizing risk-adjusted financial return and generating social or environmental impact.