FEDERAL RESERVE BANK OF SAN FRANCISCO
. It has also been the subject of several recent notable publications, including
Investing or Social and Environmental Impact, Solutions or Impact Investors: From Strategy to Imple-mentation,
Philanthropy's New Passing Gear: Mission-Related Investing
The potential size of the market is large: Global pension plans alone represent $23 tril-lion in assets compared to US foundation assets of $550 billion. The high net worth market(dened by Merrill Lynch and CapGemini as investors worth more than $1 million) is valuedat $39 trillion. As a result, impact investing represents the single biggest opportunity for capital to unleash the power of the private sector and of entrepreneurial innovation to solvesome of society’s toughest challenges.Impact investors, however, bring a wide range of divergent interests and priorities. Justas there is a continuum of expectations for nancial returns (ranging from premium to sub-market rate), there are also degrees of expectation for social and/or environmental impact(ranging from a large degree of alignment to values and/or mission to very little). The marketis in early stages and this continuum has no clearly accepted or delineated categories of “high”or “low.” Thus, beauty is truly in the eye of the beholder. Given the many motivations andpreferences, social and environmental metrics enable investors to understand if their expec-tations are being met on social and environmental criteria. Finding a way to measure socialand environmental impact is essential for providing a mechanism through which investorscan assess, compare and make investments as well as for tracking progress and making coursecorrections where needed. This is not unlike standard nancial benchmarks, where it is clear whether or not one is above, at, or below expectations. If we can truly bring together thedevelopment of these metrics with above-market rate returning investments – and better yetshow how these metrics create positive nancial value – then impact investing will be poisedto unlock large dollars and enter the mainstream.
The Importance of Dening the Relationship between Metrics and Premium Returns
The development of metrics is important for beginning to explore how and whether social and environmental metrics are drivers of nancial outperformance. If such a link canbe established, then capital will undoubtedly begin to ow into the eld, rst from inves-tors looking for returns and secondly as additional products begin to mimic the successfulimpact investments. As the cycle continues, investors will be able to compare strategies andproducts, and determine which ones are of the highest quality. The result is a higher bar andstandard for practices in impact investing in particular, and for investing in general. It is atthis point that the social and environmental measurements will play a crucial role in differ-entiating the products that are “pretenders” from those that are truly making a difference.Today, there are a few products that can make investors money and create the desiredsocial/environmental value in selected issue areas. Tomorrow, we envision products thatmake investors money because of their social and environmental benets. There are at leastthree obstacles to this vision becoming reality: 1) the depth and breadth of investment prod-ucts; 2) messaging and marketing these products; and 3) translation of externalities intomeaningful nancial measurements.