The world has never been a better mix of sunshine and hurricane as it is today. Every morning we wake up to an abyss of shocking news – be it a stark display of terrorism in one part of the world, or a face-off of two political powerhouses disrupting life in another.We have gotten tuned to being disappointed every time we browse through news channels. Not only that, even when looking out the window, all we see is the destruction of the natural balance. But even amongst these, there are plenty of good deeds,something which will make the former generation proud and the later thankful.
Not all are ruthless in this ‘mad mad world’ and you can meet them under the umbrella of ‘Positive Impact Finance’. The idea of sustainable investment is the eventual reflection of how we ‘millennials’ live life, on the stock market. Having grown up doing presentations about global warming and carbon footprints, our psychological setup attracts us to concepts which are environment-friendly, or associating with brands which foster ethics despite their price tags. And this very ideology is how a sustainable investor invests.
On the cusp of redefining consumption and propagating value led spending, we are sub-consciously bringing about a new change. Under the guidance and vision of UN General Secretary, Ban Ki-moon, awareness about Positive Impact Finance (PIF) reached far and wide. In 2015, he set in paper and ink, the UN Sustainable Development Goals which articulated finances required to achieve sustainability throughout. Forget throughout, a whopping $5-7 trillion is estimated to be pumped in annually to suffice for clean energy, water, basic sanitation and agricultural aspects only. As an answer to the proposal, they defined ways to achieve that amount in the UN’s Positive Impact Manifesto.
But how can we make a new concept viable when there are ample of profitable investment options running the market? We make it profitable too! As long as a significant string of returns garners the neck of the new model, the public will be more inclined to have a look. While impact investing solely relates to nonprofit investors, PIF includes elements which translate impact investing into returns as well. PIF canopies every financial instrument, from loans to bonds, from equity to notes. And how do we distinguish a PIF instruments from the rest? We check if it relates to at least one of the three main objectives of ethical actions: environmental, social and governance, or in short ESG.
But wish it was that easy! With thousands and thousands of social schemes mushrooming these days, sieving the ones that best fit the motive of PIF is a task. Every socially relevant initiative should only promote sustainability but also mitigate any negative impact they might foster in hindsight. For example, a harvesting solar energy produces ‘clean’ power and electricity. But setting up of solar power plants requires huge acres of land – which could either come from deforestation or be displacing population in suburban areas. So unless every so-called side effect is mitigated, these initiatives cannot be considered as an ESG initiative.
Like a two-way street, for being eligible for the benefits of these trusts, organizations must be honest. Declarations and assessment have to be carried genuinely, and ‘greenwashing’, which basically means putting everything under the light of sustainability, must be discarded.
But the movement has started and is snowballing slowly but steadily. ESG stocks and indices have been reported to outperform traditional ones with flying colors. CNBC reported MSCI ESG Index to have outdone MSCI Emerging Markets Index by roughly 50% from 2007 to 2016. FTSE Russell has devised an ESG rating model which allows investors to understand a company’s exposure to ESG criteria. Even FTSE’s traditional FTSE Global All Cap index fell short in performance to the four indices promoted by FTSE Russell as ESG-friendly. Governments are also lending massive support to boost ESG tracking indices – be it Japan’s $1.3 trillion Government Pension Investment Fund (GPIF) announcing three ESG indices to track Japanese Equity investments or Europe’s Swiss Re is making efforts to benchmark it’s $130 billion portfolio against ESG trackers. A vast range of sustainable ETFs like iShares MSCI KLD 400 Social ETF and iShares MSCI USA ESG Select ETF, amongst many others, are growing heaps and bounds.
With growing awareness of ESG, green and clean technologies are getting an unprecedented inflow of interest and mainstream popularity. Investments in such business have been significant and in a recent survey by EY, it is said that millennial investors are twice more likely to put their bets on these companies. There was also a study by Morgan Stanley in 2015, which claimed that by 2025 there will be around $30 trillion inherited by North American millennials who are just waiting to transform the world in some way or the other. Even the Royal Bank of Canada published a study which showed that the wealthy millennials have a huge appetite for impact investing.