Democratising impact investing
8 April 2019 at 1:27 pm
At the moment impact investing can feel like an exclusive activity, but there is lots to gain from democratising it, writes Daniel Madhavan, the CEO of Impact Investment Group.
Impact investing, as a practice, is inherently about agency. (It is also about power but I’m still wading through the complexity of this). It is about directing capital towards the projects, companies and ideas that you believe will improve the world. If you have money, you can invest that capital in line with your values. The first part of that sentence is pretty important: “If you have money…”
At the moment impact investing can feel like an exclusive activity. Probably because it is. For most investments you need to be certified as a “sophisticated investor” which basically means you have lots of money. In addition to the investors, the broader impact investing community tends to be a crowd that’s well educated and trained. There are exceptions, but mostly we who are using our financial skills, experience and capital to try and change the world for the better, have been materially comfortable in the world as it currently is.
So if impact investing is about agency and it is worthwhile (hint: I believe it is), we might want to broaden the number and types of people who can participate.
In this column, I’d like to run through what we have to gain from democratising impact investing, and some ways in which we might get there.
Why is democratisation good?
- More understanding. It is actually really important to have people with lived experience of a problem involved in every aspect of impact investing. Think of a social impact bond intended to keep people out of prison. Those are really high stakes, with big impacts on individuals and their families. We should know that the decisions about that aren’t just being made by a bunch of clowns on Wall St (or Collins St for that matter, and you can decide whether I am one of those clowns or not). In reality and in perception, we want those decisions to be broadly owned.
- More wisdom. This is still an emerging field and industry. We’re bringing energy and imagination to solving problems, but we’re not the first people to tackle them. Whether it’s environmentalism, social inclusion, or health, there are giants whose shoulders we can stand on. We need to acknowledge and respect that wisdom by finding the keepers of it and inviting them to collaborate.
- More money to solve problems. Impact investing is essentially voting with investment capital; collective action that has the potential for significant influence. From building a solar farm, funding education, funding a vaccination program, or planting trees, the opportunity set is broad. Often, those things are quite expensive – more than individuals are able to commit to on their own. But if a whole set of aligned individuals are given the mechanisms to express themselves through their investment choices, they can achieve a lot.
How do we do it?
- Superannuation. I’ve been banging on for a long time about why I believe the superannuation sector should be most attuned to the potential of impact investing. As a country, what should we be doing with the huge pool of wealth we have built post World War II? If the investment decisions about that pool of money (almost $3 trillion) don’t need to consider what the future of this country could/should look like, then who does? And yes, I know it is there for the purpose of providing for a members’ retirement. I just don’t think you need to compromise that whilst also investing in the future country that person has to retire into. Let’s say we want to get Australia to 100 per cent renewable energy. The University of Technology in Sydney calculated that, if we are investing Australians’ superannuation, we’d need only 7.7 per cent to get us there by 2030.
- Retail product. Technology has made access to investment options radically different for all people. There are now fairly frictionless ways to invest relatively small amounts of savings. There are even apps that let you invest the small change from your purchase of coffee! We need to figure out how to make use of technology to bring people together into crowds, investing their savings in alignment with their values and their aspirations for the future.
Many Australians, as well as asking how superannuation funds are investing on their behalf, have some capital they don’t want to put into superannuation just yet. I think that in the next few years, we’ll see more and more opportunities for everyday Australians to cast an impact investing vote for the change they want to see in the world. I can’t wait. In fact, I won’t be waiting, I’ll be figuring out how we can be part of making that happen.
About the author: Daniel Madhavan is the CEO of Impact Investment Group – a leading Australian impact funds manager and co-investor. IIG offers investments in solar, sustainable property and precincts, and impact venture capital. Sign up for their mailing list at impact-group.com.au.