ESG Investing

Pushing Impact Investing Forward: 4 Themes for 2021

The COVID-19 pandemic brought worldwide catastrophe in 2020, and the fallout revealed systemic shortcomings that may take years to rectify. While 99% of respondents to the Global Impact Investing Network‘s annual survey have historically said that they achieved their intended impact performance, the events of last year have shown that there is more work to be done and new, higher goals to be set.

Fortunately, the field has never been better positioned to meet these challenges and opportunities. In the months ahead, impact investors can continue to make a difference by addressing four themes that proved critical in the past year.

1. Impact Investors Respond to Climate Change as Potential Milestones Approach

Giving extra urgency to climate change mitigation efforts, a 2018 report from the Intergovernmental Panel on Climate Change argued that greenhouse gas emissions would have to start declining after 2020 in order to keep global warming to no more than 1.5 degrees Celsius above preindustrial levels. Although emissions dropped during pandemic lockdowns last spring, the effects were mostly reversed by the fall.

Some investors responded by divesting from fossil fuels. One notable example was the University of California, which sold $1 billion in assets to clear its portfolio of fossil fuel producers and invested the same amount in renewable energy. Others turned to shareholder engagement: shareholders passed a proposal asking Chevron to report on whether its lobbying activities are consistent with the goals of the Paris Agreement. Investors also flocked to clean energy, including exchange-traded funds holding shares in electric car companies, solar panel producers, and wind energy firms.

Investors can continue to make an impact in 2021 by financing sustainable infrastructure, such as through green bonds, investing in sustainable forestry and agriculture initiatives, and backing sustainable fashion companies. Providing capital to food tech startups can help mitigate the environmental impact of plastic packaging and reduce food waste.

Learn more: Climate Change: Harnessing the Power of Public Capital Markets

2. Racial Injustice Adds Urgency to Impact Investors’ Pursuit of Social Equity

In 2020, Black people made up 13% of the US population but 28% of the people killed by police. Despite growing public awareness of the problem, the share of victims of fatal police shootings who were people of color has not changed significantly over the past five years. The fatal shootings by police of Breonna Taylor in March and George Floyd in May sparked widespread outrage, prompting between 15 million and 26 million people across the United States to protest racial injustice and call for police reform. The Black Lives Matter movement won new support, funding, and public recognition, particularly for its activism on Juneteenth.

Dozens of asset management firms, nonprofit organizations, and individual investors signed the Racial Justice Investing statement advocating for investment through a racial justice lens as well as reinvestment in underserved communities. Investors including the New Mexico Educational Retirement Board and the Rhode Island Employees’ Retirement System committed to divesting from private prisons. Calvert announced it would ask companies it invests in to share information on racial diversity in their workforces and boards and to disclose racial gaps in employee compensation.

Some impact investors will likely view investments in community healthcare as a potential path toward racial equity.

Investors will have the opportunity in 2021 to invest in funds supporting businesses with Black owners and to back community development financial institutions, which broaden access to credit for racial minorities and others. Some impact investors will likely view investments in community healthcare as a potential path toward racial equity, especially in light of COVID-19’s outsize impact on communities of color and the increased risk of fatal police encounters among those suffering from mental illness.

Dive deeper: Racial Equity Investing: Opportunities for Impact & Alpha

3. Women Gain Seats in the Boardroom, but Challenges Remain for Gender Lens Investors

Following California’s 2019 deadline for public companies in the state to appoint at least one woman to their boards, 2020 saw additional progress for women in boardrooms and executive suites. By the end of June, women made up a record 22.6% of directors among companies in the Russell 3000 Index. Meanwhile, 44% of firms listed at least three women among the ranks of their highest executives, compared with 29% five years ago.

That said, the pandemic dealt a harsh blow to many women’s careers. More than 800,000 women over the age of 20 left the labor force, versus only 216,000 men. Some women lost jobs as majority-female fields like hospitality laid off vast swaths of workers, while others left due to increased responsibilities in households with children or ill family members.

Impact investors have continued working to advance gender equity, however. Mastercard and Starbucks agreed to Arjuna Capital’s shareholder proposals asking the firms to report on gender pay gaps. As You Sow expanded its Gender Equality Funds grading system to evaluate mutual funds by equal pay, work-life balance, and transparency. Finally, the number of private equity, private debt, and venture capital funds incorporating a gender lens into their approach hit new highs: the Project Sage 3.0 report found 138 funds that had raised more than $4.8 billion.

Going forward, some investors may want to focus on deploying venture capital to women founders, given that women remain greatly underrepresented among founders awarded venture funding and research has found smaller gender pay gaps in companies led by women. A lack of affordable childcare has presented another long-time obstacle to women joining the workforce; funding new early childcare centers or training for at-home care providers could help women start to recover from the job losses of 2020.

Keep reading: Gender Lens Investing in Public Markets: It’s More Than Women at the Top

4. Place-Based Investors Think Local to Support Communities

Concerns about gentrification have been building for years as the availability of affordable housing continues to dwindle. The events of 2020 put a spotlight on the issue of urban displacement—economic disruption from the pandemic has put more than 30 million people at risk of eviction. Research has found that the destabilizing effects of gentrification disproportionately harm minority communities and threaten their health.

In the future, place-based impact investors may want to focus on collaborations with grantmakers, community organizations, and local governments.

Community investment funds have gained prominence as entities that can funnel capital into sustainable development. For example, the Boston Impact Initiative Fund provided a bridge loan in 2020 for the construction of affordable housing. It also worked with Capital Good Fund to provide loans for the cost of immigration applications and of refurbishing homes for energy efficiency. RBC Global Asset Management partnered with several philanthropic organizations to found Investing for Impact: A Philanthropy California Investment Collaborative. The initiative plans to deploy investment capital alongside grants to increase access to affordable housing, healthcare, and other social goods.

In the future, place-based impact investors may want to focus on similar collaborations with grantmakers, community organizations, and local governments. Leaning on this cooperation opens opportunities to both gain insights from the full range of local stakeholders and to benefit from the unique strengths of each participant. Providing housing, job training, or other forms of support for underserved groups such as veterans and people living with disabilities may prove fruitful areas in which to pursue impact investing, as marginalized people are at particular risk when the place they live in is struggling.

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