As we approach the ecological limits of a finitely resourced planet, the current structural crisis of the financial system has become systemic. Achieving ecological equilibrium and an environment favourable to all life is incompatible with the financial system’s destructive logic that is optimized for one objective, and one objective only: endless accumulation of wealth without consideration for positive impact. Rather than restructuring the financial system, it is time to transcend it by moving positive environmental and social impact into its center, and by enabling consciousness and awareness to play a fundamental role. What role can and should the impact investing economy play in changing the financial system?
The impact ecosystem is driven by two movements: The Broad Impact Movement and the Deep Impact Movement. The Broad Impact Movement is embracing Environmental, Social and Governance (ESG) criteria in the context of adapting the existing system; examples include ESG funds and sustainable Exchange Traded Funds. The Deep Impact Movement is embracing thematic and systemic solutions while challenging the existing system; examples include direct equity and debt investments in regenerative enterprises, social-impact bonds, blended capital structures, and investments in community development banks.
These two movements are complimentary: Today, most 100% impact portfolios need to invest in both, broad and deep impact investments, as they strive to maximize their impact – while being constrained by liquidity objectives, targeted financial returns, as well as impact and financial risk considerations. Public equities and public debt lend themselves better to broad impact, while private and structured debt as well as private equity and real assets lend themselves better to deep impact.
The broad impact movement is an important step forward from negative screening and is growing fast. Yet, even if all the capital in the world would embrace ESG, climate change would still not be mitigated in time, inequalities would increase, social justice would stay a dream and poverty would not be alleviated – the system would not change.
I don’t expect the broad impact leaders (e.g., institutional capital) to challenge their existing business models. They are caught in the ‘innovators dilemma.’ They will continue to maximize their income capacity without a real desire to work on the systemic root causes behind poverty, climate change, inequality and social justice. This is not because they are bad, but because the market for deep impact is still tiny, and because of real or perceived systemic constraints like the current interpretation of fiduciary responsibility, or the attachment to social constructs like market rate returns and its associated benchmarks. There is no benchmark for alleviating poverty for the base of the pyramid; and nobody knows the market-rate return for providing health care services for the poorest of the poor.
The fledgling deep impact economy is challenging the existing system, and is emerging from a growing awareness and consciousness. Deep impact investing is not an intellectual exercise nor can it be legislated. It is an expression of human consciousness. Impact investing without the heart and soul is an intellectual exercise that will not lead to deep impact.
The deep impact movement is emerging as evidenced by organizations like ImpactAssets, Toniic and many, many others. I envision a time when impact investors can easily construct a 100% impact portfolio based on the impact they care about, constrained by the impact risk they are willing to take as well as their liquidity requirements – resulting in the appropriate financial returns.
Many practitioners are working on relevant topics that together will eventually lead to systemic change: democratization of deep impact investing, new term sheets, new fund structures, new investment vehicles, blended capital approaches, impact management methodologies, and the inclusion and engagement of beneficiaries in everything they do. Open source data-sets are being assembled to enable impact researchers to develop the Post-Modern Portfolio Theory or Total Portfolio Theory, that will include impact and impact risk in its core.
My purpose is to help the deep impact movement grow and prosper, by increasing the emerging awareness to challenge the existing financial system and to co-create the new one. In these pages I explain how we do that with the KL Felicitas Foundation, the 100% movement and its 100% principles, and with our support for research and technology. You can also check out inspiring resources that have helped me develop a deeper understanding of some of the systemic challenges and opportunities.