Making an Impact: A Guide for Private Market Investors

June 15, 2021

In 2015, the UN set forth 17 interlinked Sustainable Development Goals (SDGs) to serve as “a blueprint to achieve a better and more sustainable future for all.” Four years after all member countries agreed to the SDGs, leaders met to evaluate their progress toward the 2030 targets. The group acknowledged that despite the good work that had been done, the initiative was behind schedule. UN Deputy Secretary-General Amina Mohammed called 2020 “the year we must change course.”

Needless to say, 2020 brought more challenges than any of us could have imagined. From the coronavirus pandemic and tragedies that highlighted social injustice to increasing political polarization and climate disasters, these ongoing issues surged into the  spotlight.

• Concerns over the economic effects of Covid-19 turned to how the pandemic was exacerbating existing social inequalities. One report estimated women accounted for more than half of job losses despite making up less than 40% of the global labor force. Another study found the mortality rate among African Americans was more than double that of whites.
• The deaths of Black Americans including George Floyd and Breonna Taylor sparked an international movement to end systemic racism and to reform the institutions that enable it.
• Wildfires in Australia and the western US and other extreme and unusual weather events made the realities of climate change impossible to ignore.

Many around the world gained new perspective on these issues, bringing their interconnectedness into sharper focus. We came to appreciate how the effects of Covid-19 and the climate crisis were correlated with socioeconomic inequity, due to the combination of unequal living conditions and poor policies and politics. To many, civil society never looked more fragile.

We also witnessed a range of government and civic responses to these issues, all of which led individuals and institutions alike to reconsider their roles and responsibilities in contributing to a more “just and equitable world.” These responses led many investors to look more closely at the rapidly evolving impact investment opportunity set and to ponder how they might deploy capital differently.

Changes in Investor Appetite

Over the last decade, investors of all types have taken to thinking more critically about their fiduciary responsibility and their ability to help solve environmental, social and governance (ESG) problems. The rapid growth in the number of signatories to the Principles for Responsible Investment (PRI) is a testament to this evolution. Since its founding in 2006, more than 3,000 organizations representing over $100 trillion in assets under management (AUM) have adopted the PRI. More than 500 signatories are asset owners.

A 2015 PRI report underscored the link between fiduciary responsibility and ESG considerations. The private investment space is littered with cautionary tales of investors who did not sufficiently incorporate ESG risks into their investment considerations, from outright fraud to unfair labor practices and pollution. Today, institutional investors have come to appreciate that fulfilling their long-term fiduciary obligations requires a deep understanding of ESG issues and their implications for financial performance.

Although many investors started with the idea of incorporating ESG into their investment process, groups like the PRI have shifted that discussion from divestment to engagement, from negative screening to proactive ESG-related value creation. As ESG integration has become the rule, investors are looking for opportunities to generate targeted social and environmental outcomes, with a view toward having more intentional impact with their investment dollars.

Several additional secular changes are contributing to this shift in perspective.