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Social Finance: Driving Impact Across Assets & Approaches
Next week marks the first annual Canadian Responsible Investment Week, featuring the Responsible Investment Conference (May 26th – 28th) in Toronto. The conference presents an excellent forum to discuss opportunities to use the investment markets to support the changes we want to see in the world. Many will be asking the question, which approach to social finance is the best? Here, I contend, we can take a lesson from the traditional capital markets — diversification is crucial: the best tactic is a portfolio of them.
Though I spend the majority of my time thinking about impact investing, I’d like to share some thoughts on how impact and responsible investment can work together to advance the big goals of social finance. All investments have impact, whether positive or negative. We need to ensure that our conversation includes the full spectrum of asset classes and approaches: we need to intentionally employ more of our investment portfolios to make meaningful progress on mobilizing markets for good.
Social finance is an emerging field with a growing following. For discussion, let’s look at social finance as a blanket term for investment approaches that incorporate environmental, social and governance (ESG) considerations into decision making. The big goals of social finance aren’t timid, nor should they be. Social finance is about reframing how markets identify opportunity and risk, and recognize value. It’s about reimagining efficient markets, and redefining good business.
Under the umbrella of social finance, we find various forms of responsible and impact investing. The table below, borrowed from the recent State of the Nation: Impact Investing in Canada report, does a good job of laying this out visually:
Moving from responsible to impact-first investing, all approaches involve ESG considerations. Traditional RI tends to employ screening practices to avoid investing in companies with poor ESG practices. SRI funds take a more proactive, or positive approach, screening not only to remove companies with poor ESG practices but also to identify those with best-in-class practices. Impact investment focuses on businesses with a core social purpose.
As mentioned, all investments have impact, whether positive or negative. “Pure” impact investment opportunities, with a core social purpose, are currently limited — touching only a small fraction of investor portfolios. If we’re going to make progress, then we must not overlook other components of our portfolio, and other opportunities for positive impact.
Responsible and impact investing play symbiotic roles on the social finance continuum. For example, RI and SRI mainly utilize public equities, where impact investment frequently takes place in the private markets. As is well articulated in the Total Portfolio Activation framework, specific asset classes can be well suited for generating particular kinds of impact, “ranging from high-impact shareholder engagement with publicly traded companies, to directly influencing companies through a board seat in private equity, to sustainably managing timberlands in real assets.”
By thinking holistically, and understanding the range of asset classes and approaches — and the activities that can generate impact within them — investors can pursue impact in more deliberate and strategic ways. To achieve the results we want to see in the world, we need to activate more of our portfolios to drive impact across assets and approaches, and we need both responsible and impact investment to get us there.
I look forward to continuing the conversation during Responsible Investment Week.
Editor’s Note: This content represents the thoughts of the author and does not necessarily represent the position of TD Bank Group.
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