When problems seem insurmountable, innovative solutions are needed to try to solve them. The government plays a key role in incentivizing financial preparedness through risk-sharing government programs and awareness building as well as through public/private partnerships. From a financial perspective, the primary means of preparing for and rebuilding a disaster is insurance, in various forms. Insurance is a form of risk sharing between the insurance company and their policy buyers. Insurance also plays an important role in incentivizing property owners to invest in disaster-mitigating improvements in exchange for premium reductions. In widespread catastrophes such as Hurricane Katrina, insurance companies are often overwhelmed and unable to meet all the claims, so other innovative forms of financing are being engineered. Weather derivatives and catastrophe bonds are newer examples of what is on offer. And of course, there is the traditional form of popular charitable response that needs to be better organized for efficacy and transparency. The new asset class of impact investing could also play a key role in the reconstruction phase.
While 2011 may have unfortunately been a year filled with disastrous events, it was also a banner year for the movement to build impact investing into an asset class. Impact investing refers to an asset class that invests in organizations with the mission to solve environmental and social problems while also generating a financial return. Impact investors are challengers to the silo-effect thinking that suggests that financial gain and social change are mutually exclusive. The rigor of private sector investing standards could be used to increase efficiency and productivity in areas more traditionally relegated to the public and nonprofit sectors, including disaster response. The question is how public funding can create “envelopes of investment” opportunities that will then be ripe for private sector investment to take over in the field. The public sector is designed for building capacity and infrastructure that facilitates investment, so the private sector can then enter at a later stage. Impact investing could be the hybrid between these two entities.
While impact investing may be a new field, it has roots in much earlier traditions. The tradition since the rise of capitalism, even dating back to the writings of Adam Smith, has been to impose an artificial divide between the pursuit of financial gain and the moral compulsion to give back to society. Put simply: we have separated the actions of making money and doing good. Contrary to popular opinion, the market is a man-made invention that is not infallible. Changing it to incorporating social and environmental factors is a natural progression of the maturing process. Thought leaders such as George Soros and Bill Gates have exemplified that these changes can occur by relentlessly pursuing profits to earn fortunes, but later refocusing their attention on giving a large portion of it back. In recent years, social pioneers, such as Muhammud Yunus, Anthony Bugg-Levine, and Jed Emerson to name a few, have suggested that the assumption of separation should be reevaluated. Instead, the rule of first do no harm should be followed throughout an investor’s career. The next logical goal would then be to invest with the intention of reinforcing positive impacts for society as a whole while simultaneously generating personal financial returns.
Impact investing has arisen to address the presence of an opportunity that there is not enough philanthropic and public sector financing to solve the broad scope of social issues as diverse as entrenched poverty and environmental decline that we face as a global society. Especially in the current economic climate, in which governments are scaling back social entitlement programs and even funding for federal disaster relief funding is a subject of national debate, pragmatic new solutions must be found to address the needs of the populace. Impact investing has a long history reaching back to the Quaker movement in the nineteenth century to the socially responsible investing (SRI) movement that applied negative screens to funds. In recent years, it has begun to grow significantly and new financial products are being engineered to allow investors to express their values through their investments. In a comprehensive report, J.P. Morgan argues that impact investment has emerged as a distinct asset class and that such a classification will promote growth and specialization within the sector, similar to what happened with commodities and hedge funds. The scale is estimated to reach $400 billion to $1 trillion over the next ten years for services reaching poor populations in the sectors of housing, rural water delivery, maternal health, primary education, and financial services. These issues are exactly the kinds of issues that become relevant during post-disaster reconstruction phase of rebuilding.
As the idea matures, it is being pitched as an asset class with growth potential in order to gain financing. SRI is a parallel but older idea than the more recently adopted umbrella term of impact investing. SRI is often framed as an innovative investment strategy that can lead to new avenues to profitability. It is a way for corporations to self-manage with the promotion of active governance policy as a complement to existing laws and regulations. It has sometimes been framed as a win-win investing strategy in the face of the sustainability crisis: it can help to reduce the impact while also generating new lines of business. It is possible that profitability could result from incorporating environmental and social factors into an investment strategy. The concept suggests that companies that are ready to face these challenges are nimble, flexible, and forward-thinking companies that will ultimately provide superior returns for the investor who has the same long-term vision of the world. There is a clear need for more avenues of investment.
The opportunities for investment are diverse and far-reaching. They cover a lot of different areas of social progress. There are a variety of model experiments that fall under the diverse umbrella of impact investing. A few funds have been leading the pack for a while, such as the Calvert Social Investment Fund. As one of the field’s pioneer funds, its founders arrived at the idea of impact investing because the western breakdown between making money and then giving it away through charity seemed counterintuitive. It has invested in many startups that have since generated significant returns, but would have been overlooked with a traditional investment strategy. Mostly, the social entrepreneurs focus on finding solutions to global problems and the investors provide them with varied kinds of support. The ideas range from a social enterprise that reduces pollution and energy dependency in developing countries through innovative engineering and product creation to providing market access to individuals who lack it. The rigorous investment standards keep the entities focused on efficiency and scalability. These types of case studies are practical roadmaps for other potential entrepreneurs who are considering entering the field as investment candidates.
There are very few resources that address the potential for using impact investing following a large-scale disaster. After a disaster occurs, there is a clear need for new ideas about how to rebuild the local economy. Impact investing, whether through a focus on entrepreneurs or through social impact bonds or through some even newer innovation, could be a new option.
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