Capitalism 2.0: where profit and purpose meet
Impact Investing We are already using humanity’s greatest invention - money - to heal the world’s social and environmental ills. We can invest in a future where no one lives in poverty and the planet thrives.
Take a moment and imagine Capitalism 2.0: a world where our economies drive solutions to poverty and environmental degradation, rather than exacerbating the challenge.
Mindful of the effect of their investment decisions on people and planet, a critical mass of investors already believes in this collective responsibility to minimise negative externalities and maximise positive impact.
The next phase of capitalism makes money more conscientious and the economic system more equal, just, and compassionate. The central tenet of this economic system is capital + purpose = impact. This principle underlies the impact economies we envisage for the global community in Capitalism 2.0.
But first, we need the mass mobilisation of impact investment to guarantee this future.
According to the UN, $23 trillion of the global $87 trillion financial assets under management (excluding Latin America and Africa) is already aligned to supporting the UN’s Sustainable Development Goals (SDGs). Such investments are called “responsible”, “sustainable” and “impact” investments. Along this continuum, they are delivering similar returns in the developed world, and superior returns in developing world, when compared to to pure wealth maximisation strategies.
India, the site of GSG’s Impact Summit in October 2018, has multiple impact enterprises with greater than $1 billion revenues or valuation – Amul Dairy in dairy farming, Jain Irrigation in agriculture, Ramki Enviro in waste management, AU Small Finance Bank in financial inclusion, and ReNew Power, Mytrah Energy, Orange Renewable and Welspun Energy in renewable energy, are all impact enterprises.
India also offers an example of the influence these investments can have in Capitalism 2.0. McKinsey recently estimated that impact investments in India returned 11% internal rate of return (IRR) – a measure of profitability used in capital markets – between 2010-2016 in dollar denominated terms, across $4.5 billion of investments, while impacting 60-80 million lives annually. Why should anyone invest without seeking impact?
These enterprises are replicable elsewhere in India and across global markets looking for impact. Here’s how the impact continuum brings us closer to Capitalism 2.0.
The ABCs of the impact continuum:
Act to Avoid Harm
Responsible investments Act to avoid harm to their stakeholders, by, for example, decreasing their carbon footprint or paying appropriate wages. Managing environmental, social and governance (ESG) risks are the biggest part of this component.
Responsible investments already make up a significant proportion of some large institutional investors’ portfolios and are performing on par with conventional assets. PGGM, the €183 billion Dutch pension fund, estimates responsible Investments make up 81% of its portfolio. Meanwhile, Blackrock’s BSF Impact World Equity Class returns 22.4%.
This proactive behaviour from institutional investors has created a $16 trillion sector and will ultimately lead to fossil fuel stocks, tobacco and liquor companies, arms and ammunition corporations, and other kinds of polluting industries or those considered detrimental to society, quickly falling out of favour with their financial backers.
Sustainable investments Benefit stakeholders, for example, by proactively upskilling their employees, or selling products that support good health or educational outcomes, are next in the impact continuum.
These investments include ESG integration and sustainability themed investing, for example green finance. Overall, sustainable investing is now $6 trillion in size. PGGM’s portfolio has 5% of such sustainable investments.
Impact investments are further along the impact continuum: they can also use their capabilities to Catalyse solutions to pressing social or environmental problems -- for example, by enabling an otherwise underserved population to achieve good health or educational outcomes, financial inclusion, or hiring and skilling formerly unemployed individuals.
We cannot be spectators to social injustice and climate injustice any longer. As former UN Secretary General Ban Ki-moon said, “We are the first generation that can end poverty, the last that can end climate change”. We must rise to the challenge and opportunity of creating Capitalism 2.0 – this is a vision worth striving for, worth living for, and worth investing in.