A History of Impact Investing
Impact investing is a major topic on investors’ radar screens, boasting huge growth, and widespread acceptance among those seeking to align their portfolios with their values. But impact investing has always been more than a fad.
- Socially responsible investing’s origins in the United States began in the 18th century with Methodism, a denomination of Protestant Christianity that eschewed the slave trade, smuggling, and conspicuous consumption, and resisted investments in companies manufacturing liquor or tobacco products or promoting gambling.
- Socially responsible investing ramped up in the 1960s, when Vietnam War protestors demanded that university endowment funds no longer invest in defense contractors.
- The combined efforts of protests and responsible investing during the Vietnam War and Apartheid in South Africa, led to institutional and legislative change.
- Over time, research has backed up this strategy: companies that care about the environment, promote equality among employees, and enforce proper financial guidelines tend to accrue added benefits to investors.
History of Impact Investing
Impact investing is also referred to as socially responsible investing (SRI). The practice has a rich history. In Biblical times, ethical investing was mandated by Jewish law. Tzedek (which means justice and equality), comprises rules to correct the imbalances that humans cause. Tzedek is referred to in the first five books of the Bible—collectively called the Pentateuch—thought to have been written by Moses from 1,500 to 1,300 B.C.E. According to Jewish tradition, these rules apply to all aspects of life, including the government and the economy. Ownership carries rights and responsibilities, one of which is to prevent immediate and potential harm.
Several hundred years later, the Qur’an, thought to have been written between 609 and 632 C.E., established guidelines, based on the religious teachings of Islam, which have evolved to what are now Shariah-compliant standards. One of the more common of these standards is called Riba. The overarching goal of Riba is to prevent exploitation. Riba bans usury, and this rule extends to forbidding all interest payments. Rooted in a philosophy that governs the relationship between risk and profit, Shariah law delineates the responsibilities of institutions and individuals. In addition to financial dictates, it also rules out investments in alcohol, pork, gambling, armaments, and gold and silver (other than spot cash, or money that is paid for something immediately).
Origin of Socially Responsible Investing (SRI) in the United States
Socially responsible investing’s origins in the United States began in the 18th century. Methodism—a group of historically related denominations of Protestant Christianity—eschewed the slave trade, smuggling, and conspicuous consumption, and resisted investments in companies manufacturing liquor or tobacco products or promoting gambling.
The Methodists were followed in 1898 by the Quakers, another Protestant denomination. The Quakers forbid investments in slavery and war. Eventually, in 1928, a group in Boston founded the first publicly offered fund, the Pioneer Fund, which had similar restrictions. These early investing strategies applied by these various groups were intended to eliminate so-called “sin” industries. Today, sin stock sectors usually include alcohol, tobacco, gambling, sex-related industries, and weapons manufacturers.
Socially responsible investing ramped up in the 1960s, when Vietnam War protestors demanded that university endowment funds no longer invest in defense contractors. Eventually, the long-standing principles of socially responsible investing came to represent a consistent investment philosophy allied with investors’ concerns. These ranged from avoiding the slave trade, war, apartheid, and supporting fair trade, to issues more common today concerning the ethical impact of environment, social, and corporate governance (ESG).
Pressure From Investors Can Lead to Change
In the process, several success stories emerged. In 1977, Congress passed the Community Reinvestment Act, which forbade discriminatory lending practices in low-income neighborhoods. Repercussions from Chernobyl and the Three Mile Island nuclear disaster in the 1980s spawned anxiety over the environment and climate change, which led to the launch of the U.S. Sustainable Investment Forum (US SIF) in 1984.
Then, apartheid in South Africa became an impetus to force corporations to divest from South Africa. Apartheid—literally meaning “separateness”—was designed not only to keep the country’s non-white majority apart from the white minority but also to decrease black South Africans’ political power. This system of legislation dates back to the passage of the country’s 1913’s Land Act. The Act forced black Africans to live in reserves and barred them from working as sharecroppers.
In 1985, students at Columbia University in New York organized a sit-in, demanding that the University cease it’s investing in companies doing business with South Africa. The combined efforts of protests and responsible investing paid off—$625 billion in investments was redirected from South Africa by 1993. And the results were far-reaching. Upon his release from prison in 1990, Nelson Mandela worked with President F.W. de Klerk to develop a new constitution for South Africa. Both of these men shared the Nobel Peace Prize in 1993.
Institutional Support for Impact Investing
In 2006, the United Nations Principles for Responsible Investment (UN PRI) was released, which led to $45 trillion in signatories’ assets. The Global Sustainable Investment Alliance (GSIA), a consortium of international sustainable investment organizations, issued its inaugural issue of the Global Sustainable Investment Review in 2012. Adding even more gravitas to the practice of SRI, in 2013, British Prime Minister David Cameron gave a well-received speech on impact investing.
The Bottom Line
Grounded in a history dating back 3,500 years, and driven initially by the idea of doing well by doing good, the scope of impact investing has broadened to encompass global change and generate competitive returns.
In the beginning, socially responsible investing was primarily focused on eliminating investments in products that conflicted with personal belief systems or social, moral, or ethical values (for example weapons, alcohol, tobacco, gambling).
The practice has now evolved into an investing strategy that proactively makes investments in companies that are creating a positive impact. For example, they may focus on companies that demonstrate good stewardship of the environment, maintain responsible relationships with customers, employees, suppliers, and communities, and exhibit conscientious leadership regarding executive pay, internal controls, and shareholder rights. And over time, research has backed up this strategy. Companies that care about the environment, promote equality among employees, and enforce proper financial guidelines tend to accrue added benefits to investors.
James Lumberg is the co-founder and executive vice president of Envestnet.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.