Originally published in Forbes by Scott Amyx
As part of the United Nations 2030 Agenda, the U.N. General Assembly has set forth the 17 global sustainable development goals (SDGs) to address poverty, hunger, health, education, gender equality, clean water, clean energy, economic growth, industry, inequality, cities, production, climate change, oceans, land, justice and partnerships.
It’s estimated that achieving the SDGs would require $2–3 trillion per year for the next 15 years. Ironically, the global cost of corruption is at least $2.6 trillion, or 5% of the global GDP. The World Bank estimates $1 trillion in bribes every year. Those annual figures closely match the capital needed to achieve the SDGs.
An important assumption in these figures is the initial and ongoing cost structure to implement large-scale infrastructure, energy, housing and other capital projects spearheaded by the likes of UNOPS and the World Bank. The utilization of outdated technologies results in new development quickly deteriorating to housing slums and health clinics that exceed capacity upon opening. The World Bank recognizes that they need to incorporate commercialization-ready exponential technologies to drive down the CapEx and OpEx while increasing efficiency, resiliency, sustainability and capabilities. For instance, AI algorithms on smartphone apps may soon be able to accurately detect skin cancer without the need for villagers to travel to a health clinic or to crowd a clinic facility. Innovation isn’t limited to physical infrastructure or material science.
Aspiration Versus Reality
There is a growing investment trend as pensions move toward a sustainable investment strategy. A recent report indicates that “as much as 10% of the $269 trillion of investable financial assets around the world could be tapped for social impact.” The IFC estimates that demand for impact investing could be as much as $21 trillion in public markets, with another $5 trillion in private equity, debt and venture capital. Currently, $700 billion is deployed through DFIs, and $400 billion through green and social bonds.
The Global Impact Investing Network (GIIN) estimates the size of the global impact investing market to be $502 billion, deployed by 1,340 organizations. The Global Sustainable Investment Alliance sizes the impact investing market at $444 billion. And the IFC estimates $71 billion is currently invested in private impact funds.
Obviously, $71 billion to $21 trillion is a wide range. So what is the real size of the private impact investing market? In order to answer this, we first have to define impact investing. Most of these lofty figures are describing environmental, social and governance (ESG) criteria. Socially conscious investors use these criteria for a business’s operations to negatively screen potential investments. The estimates do not translate into greenfield projects that are implementing SDGs. It’s simply a filter to screen out investments.
The careless use of the impact investing lexicon is forcing organizations such as the GIIN to establish core characteristics of impact investing to safeguard against the effects of disingenuous and mistaken marketing that could jeopardize the integrity of the industry.
Misalignment Of Capital And Social Impact Causes
The pension funds and institutional investors have the trillions in capital to deploy. However, pensions, in addition to generating sufficient returns, are most interested in cash flow patterns to meet future pension liabilities. Unfortunately, not all impact investing projects meet the minimum rate of return or cash flow requirements of pensions. Moreover, there is disdain by pension funds to be sold products by asset managers. Keep in mind that ESG or impact products marketed by fund managers are not the same as proactively investing in SDGs. As such, worthy impact projects that desperately need capital to pursue greenfield projects struggle to raise funding.
Classification Of Impact Investing
Lumping SDG-related projects into the broad category of impact investing is not helpful. As there are styles of investing in investment classification, such as large-cap, growth, income and international and emerging markets, impact investing would benefit greatly through style classification. For pension schemes, they are interested in cash flow or income-generating investments, whereas private equity and venture capital are most interested in the rate of return and multiples. Some impact investing projects may have neither income nor growth, and it’s important to designate the appropriate style category to properly market the projects.
Product Innovation To Open Up The Capital Floodgates
The IFC has established a set of operating principles developed with fund managers and DFIs to harmonize standards around impact investing and lower the barriers to entry for the sector. Sixty investment groups have signed up for the new code. Collectively, they represent around $350 billion in assets managed in impact investment funds and products. However, such code does not guarantee that trillions will be allocated to impact investing.
What’s required is a systematic market approach that enables impact-driven institutional investors to participate with minimal friction. A case study, though dissimilar in risk-return characteristics, is the crypto market. 2018 was a volatile year, as $700 billion was wiped off the market capitalization. New instruments such as the Grayscale Bitcoin Trust, the first publicly quoted open-ended investment fund for bitcoins, enabled “investors to gain exposure to the price movement” of bitcoin “through a traditional investment vehicle, without the challenges of buying, storing and safekeeping” bitcoins. Grayscale has become the world’s largest digital currency asset manager. As of April 2019, their assets under management were $1.1 billion. How is it possible that a company of 11 employees could manage over a $1 billion and open up the floodgates?
Solving The Capital Issue Is Possible
We need to stop the madness of door-to-door selling to institutional investors. We can’t change institutional investors overnight. However, a systematic approach to product innovation can open up the floodgates for early adopters across the institutional investment community to allocate billions to trillions needed to achieve the SDGs.
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