Trump’s chilly bluster must be countered by warmer winds
OPINION: There’s a message blowing across the Atlantic that the business of investment is to maximise return, and considering people and planet is woke nonsense. This argument is outdated, says GSG Impact chair and former UK minister Nick Hurd (pictured). The transition towards real ‘impact economies’ is the long-term trend – but the EU must hold its ground.
There is a cold wind blowing across the Atlantic towards Europe. It blows in the face of those who think approaches to investment need to evolve. The message in the wind is that the business of investment is to maximise return, and all other considerations are woke nonsense. This message has an audience, and it comes at a time when the US$40tn ESG market has been vulnerable to charges of greenwashing.
It needs a robust response, because the argument is out of date.
We need to distinguish between short-term cycles and the long-term structural trend. The long-term trend is towards impact on the real-world becoming an increasingly important factor in all investment decision-making, and the reasons for it are rooted in the business case, and the political case – which is why they aren’t going away.
When impact drives economies
Firstly, we have to recognise that the landscape of investment risk and opportunity has changed profoundly for asset owners and managers. Whatever the Trump bluster, climate instability is real, and recognised as a major business and portfolio risk that needs to be understood and managed. The actual cost is now measured in hundreds of billions of dollars each year, much of it uninsured, or even uninsurable. Failure to understand and manage that risk is an abdication of fiduciary duty. On the flip side, investors are alive to the investment opportunities triggered by the energy transition, and by the need to build resilience around the world.
Failure to understand and manage climate risk is an abdication of fiduciary duty
This recalibration of investor priorities is accompanied by shifting expectations around the risk management and impact information that shareholders and other stakeholders require. In my experience, in open markets as in democracies, changes in transparency flow in one direction: once you start giving people useful information, it is hard to take it back. Growing impact transparency is accompanied by real momentum in understanding how to value impact, and integrate it into financial statements so that investors can make meaningful comparisons between companies and investment decisions. This is no longer fanciful: real companies are testing impact accounting as a logical evolution of our ability to improve our processes and make better decisions.
Ultimately, this is a path to what at GSG Impact we call “impact economies”: economies in which impact on people and planet is an economic factor, and driver of value, at the heart of all political, investment, business and consumption decisions. This a future in which there is real accountability for impact, and incentives are aligned for decision-makers to allocate more resource to investment in positive impact.
The ultimate business case: customers want it
My second and linked reason for optimism is the ultimate business case: customers want it – and will increasingly have the information to be more assertive in expressing that preference. The ESG market is flawed and needs to move towards real impact, but we need to recognise that the rapid growth it saw in the late 2010s and early 2020s was driven by market demand for something different. There may be some short-term turbulence, but I think it a reasonable bet that this was the start of a structural shift that will only build momentum as we move further into the biggest inter-generational transfer of wealth in human history.
We also now have data that tells us that investing for positive impact does not have to compromise return requirements. Meanwhile, the impact investment market continues to grow, as does the growth in funds raised using instruments that link finance to impact.
Under-pressure governments need impact investment
My third reason is a new structural lever. Governments need more impact investment – even if many of them do not know it yet. No government has enough money, and most are under ever more pressure to deliver better outcomes, meaning the question of how to engage in more meaningful impact partnerships with the private sector will become increasingly relevant.
Governments need more impact investment – even if many of them do not know it yet
Under successive governments of different political colours, the UK has been a frontrunner. As a former Conservative minister, I am delighted to see a Labour government allocate more dormant assets to social investment, and commit to a £500m outcomes fund targeting improved outcomes for young people.
Through the GSG Impact Partnership, now active across 48 countries, we can see other governments looking to reach out across silos. This matters because governments have toolboxes full of interventions that can transform the landscape of incentives, and in turn the supply of appropriate opportunities to invest for impact.
The EU must hold firm
In all this, the position of the EU matters enormously – as a maker of rules and standards, and a counterweight to the regressive voices coming from decision-makers in the US. We need decision-makers at the EU to hold firm, confident in the long-term trend towards impact as a value driver, and in this opportunity to improve European competitiveness.
The position of the EU matters enormously...as a counterweight to the regressive voices coming from decision-makers in the US
Now is the time to double down on ambition
In the face of this cold wind, the best response is to double down on ambition. We should not be limiting ourselves to the growth of a niche investment strategy dubbed “impact investment”. The idea that it’s outdated and wrong to see investment decisions as siloed off from the real world is now mainstream.
Looking forward, the imperative is much broader – to make and win the case for impact economies, creating real accountability for impacts on people and planet across public and private sectors. The imperative is to align the incentives to allocate more of our wealth to investments that deliver positive social and environmental impact, alongside acceptable return.
That is the warmer wind, and the smarter approach, that will propel us to a more inclusive and sustainable model of generating prosperity, and improving living standards.
As a minister, Nick Hurd helped foster the growth of social enterprise and impact investing in the UK, including the launch of social investment wholesaler Better Society Capital. He stood down in 2019, and he is currently chair of GSG Impact, the global network that works to progress global financial systems towards becoming impact economies.
Header photo: Nick Hurd speaking at Camino al Impacto, the sixth annual event of SpainNAB, earlier this year (read more about that event here)
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