A New Impact Frontier Beyond ESG in 2023

Intro

Systemic risks to the financial system continue to emerge as the numerous environmental and social challenges we face globally become increasingly acute and urgent. As we navigate an inflationary macro environment in a period of market volatility not seen since 2008, the need is greater than ever before to accelerate the evolution of the traditional 60/40 portfolio as a new positive impact paradigm emerges calling for a systemic shift in how and why we invest. 

2023: A new market era of positive impact

The Global Impact Investing Network (GIIN) estimates the worldwide impact investing market size to be $1.164 trillion and defines impact investing as “investments made with the intention to generate positive, measurable, social and environmental impact alongside a financial return."

Additionally, by 2025, Bloomberg reports ESG assets may hit $53 trillion, a third of global AUM. The OECD Global Outlook on Financing for Sustainable Development 2023 report states that the sustainability financing gap, or the amount of capital needed to achieve the United Nations Sustainable Development Goals in developing markets, increased by 56% percent in 2020, totaling USD 3.9 trillion.

The current impediments in impact capital flow towards sustainable investments have many contributing factors, among which is the common utilization of ESG integration into investment decisions by actively screening out investments that appear to not attain required ESG benchmarks. Rather than driving capital towards sustainable and impact investments, this often tends to bias capital away from the investments in which capital can achieve the most amount of impact. This is particularly important when considering investment exposure in emerging and frontier markets, which have traditionally been considered uncorrelated with developed markets, creating a larger scope for a potential higher return on capital.

To build a more sustainable economy in our new era of positive impact, it is vital to go beyond ESG integration and increase the identification and integration of nuanced qualitative factors such as a company’s positive impact on its community, customers, stakeholders, and surrounding environment and society into portfolio diversification strategies to amplify the purpose and positive impact of investment allocations.

Filling the Resilience Gap: looking beyond risk to focus on real world investment outcomes

Climate change and other environmental and social crises pose a systemic risk to our global community. In order to build a diversified portfolio that is resilient within the context of macro volatility, it is critical to channel investments into companies that expressly state their defined sustainability outcomes that build systemic resilience, i.e companies that focus on the financial systems ability for adaptation in an uncertain market environment. Real world positive impact outcomes can be defined by the following criteria:

• Intentionality: As a key element of investors generating positive change, intentionality focuses on investor willingness to actively contribute to the generation of social and environmental investments through investment thesis development and clear objective goal setting.
• Inclusivity: Inclusivity is a critical aspect of creating real world positive outcomes through investment, as including inclusivity within your portfolio ensures that underrepresented and marginalized populations are provided with equal access to opportunities.
• Additionality: Additionality allows a company to be able to increase their net positive impact due to the active participation, intentionality and actions of investor capital.
• Measurement: It is often stated that what cant be measured can’t be improved. Your goals and objectives as an investor should evaluate the externalities, or positive or negative outcomes of a given economic activity that affects a third party that is not directly related to that activity and make the appropriate adjustments to your unique impact investment strategy.

The New Investment Playbook: Build portfolio resilience through focusing on depth and scope of positive investment impact

The new impact frontier beyond ESG in 2023 requires creating a robust positive impact paradigm necessary to build our global sustainable future.

As investors adjust their expected returns or costs of capital to account for the repricing of physical, transition, and liability risks, there exist numerous possibilities of higher alpha generation through identifying forward-looking impact indicators leading to positive real-world outcomes across asset classes.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Diversity & Inclusion Investing Leadership