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Significant momentum has been building over the past year towards the shift to stakeholder capitalism. COVID-19 demonstrates the importance of defining a ‘new normal’ for investing, and highlighting the importance of delivering societal impact beyond financial returns. Welcome to the era of enlightened capital.

Over the past few months, we have seen several calls to action make their way onto executive and board agendas, driven in part by efforts such as the new Davos manifesto, and the August 2019 letter from the Business Roundtable redefining the purpose of the corporation.

As a result, the business community has been placed under increased scrutiny. Stakeholders want to know how they are adapting their business models to create value for business and society over the long-term. It is a shift away from shareholder primacy which serves to broaden the way companies incorporate stakeholder needs as part of business decisions.

COVID-19 exemplifies the interdependent relationship a company has with the community it serves, and highlights the prominent role that impact and key environmental, social, and governance (ESG) factors have in contributing to the resilience of a business. As we continue to navigate the uncharted waters presented by the pandemic, there are important lessons fueling the momentum for impact and ESG as the new normal in investing.

As we continue to navigate the uncharted waters presented by the pandemic, there are important lessons fueling the momentum for impact and ESG as the new normal in investing.

Investors drive change

Investors play a critical role in driving the shift to stakeholder capitalism. Indeed, there are now a growing number of retail and institutional investors actively scrutinizing companies based on the way they manage ESG risks and opportunities related to their operations.

Some of these investors are going even further, seeking out opportunities to invest in companies based on the positive impact they are able to create through the solutions their products and services provide to social and environmental challenges.

Many large financial institutions are responding to investor demand. Goldman Sachs announced in late 2019, for example, that they would channel US$750 billion towards investments related to climate and inclusive growth.1 BlackRock — already a leader in sustainable investing — announced in January 2020 the launch of its Global Impact Equity Fund as part of its efforts to increase sustainable assets in its portfolio to US$1 trillion.2

Private equity, hedge fund managers, infrastructure and real estate investors are also getting in on the action. KKR, for example, recently closed its US$1.3 billion Global Impact Fund. TPG and Bain Capital are preparing to close their second impact investing funds. In February 2020, the Carlyle Group announced their thematic approach to investing with impact across the firm. Many long-standing dedicated impact investment managers, such as LeapFrog Investments and BlueOrchard (recently acquired by the Schroders Group) are also increasingly active.

This article is featured in Frontiers in Finance – Purpose or profit? Why not both.

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KPMG professionals' conversations across the financial services sector suggest we are in the midst of a massive shift as investors seek to deploy capital in opportunities that provide the desired risk/return profile alongside impact. Even casual observers can see that the impact investing market is heading for continued growth.

COVID-19 is resulting in many reexamining both their core values and the factors that drive value in a business. A number of these factors are consistent with the attributes of impactful companies, including an organization’s agility, culture, employee and brand loyalty. The intentionality of the positive impact it has on stakeholders is critical, in particular the solutions it offers to societal challenges through its business model.

Many are now asking how can businesses adapt, and do things differently in the future to maintain these gains and emphasize these attributes as we emerge from COVID-19? How can this be more broadly incorporated into investment objectives?

COVID-19 exemplifies the interdependent relationship a company has with the community it serves, and highlights the prominent role that impact and key ESG factors have in contributing to the resilience of a business.

Build trust to build Assets Under Management (AUM)

Another imperative highlighted by COVID-19 is trust. While many investors are embracing the pursuit of impact as part of their investment approach, some are skeptical absent a standard measurement approach, and definitions that govern impact.

Our view suggests that, if financial institutions want to scale up their impact products and attract more investment capital, they will need to focus on improving trust. Furthermore, our experience supporting the growth of impact investing suggests there are three broad areas where financial institutions should be focusing in order to help drive investor engagement and build trust.

  1. Transparency and disclosure
    1. Don’t underestimate the importance of communication.
      Investors want more than just financial reports; they want to understand the rationale behind their fund manager’s approach to impact and their plans for continuous improvement. Enhanced communication — supported by credible data and evidence — is essential.
    2. Incorporate independent voices.
      With concerns circulating about ‘impact washing’, the involvement of independent advisors with the design of your impact approach can bring comfort to investors, in particular as you work to establish impact expertise on your team. A number of fund managers are also incorporating impact assurance as part of their year-end process to provide investors with an independent perspective over the way they are executing their approach.
  2. Authenticity and integrity
    1. Share perspectives.
      Our conversations with investors suggests they want to know how perspectives and experience are being incorporated and that their financial institutions are iterating their approach as the market evolves.
    2. Demonstrate intent.
      Financial institutions are increasingly being asked to demonstrate their wider commitment and ability to contribute measurable impact at scale alongside financial returns. Investors want to know how the general partner sees the potential for impact investing more broadly at their firm beyond a niche fund.
  3. Integration of impact
    1. Don’t just measure impact, manage it.
      A core way to demonstrate intentionality around impact is by managing it as part of ownership of the asset. Impact metrics can be leveraged to drive better operational decisions that help achieve impact where it’s intended, as well as enhance or create new value.
    2. Assess the net impact.
      While the intention of impact investing is to always generate a positive impact, the reality is that — sometimes — there can be unintended consequences that also need to be considered. Investors are increasingly asking about the ‘net’ positive and negative impacts associated with their investments.

Look ahead

There should be no doubt that impact will play a significant role in financial services in a post-COVID-19 world with its appeal to a broader range of investors beyond those who identify as impact investors. With the increasing number of businesses that identify as purpose-driven, and the momentum building to establish standards around ESG and impact frameworks and metrics, the work of asset managers and asset owners will become easier.

While we encourage financial institutions to focus on building trust with their clients and investors, we also advocate continued cooperation at the industry level. Indeed, it will take concerted efforts across the impact investing ecosystem if the industry hopes to drive growth in this market.

Considering impact as part of investment decisions is the future of finance. Welcome to the era of enlightened capital.

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