Back during my days at university when I was studying economics, discussions were usually around free economies and the Adam Smith driven capitalist mindset. The related view by Milton Friedman that the sole responsibility of a company is to maximise shareholders wealth, has been the primary guiding principle almost across the world for decades. However, that has started to change relatively recently. In 2017, a Nobel Lawyer from Harvard (Oliver Hart) and a scholar from the University of Chicago (Luigi Zingales) put forth an alternative definition. As per their research, the ultimate shareholders of a company (either institutional investors or those who invest in those institutions) are ordinary people who in their daily lives are concerned about more than just money. They have ethical and social concerns, for example some people buy an electric car because that person cares about pollution or global warming. Taking this into account, in reality, the aim of companies is shareholder welfare rather than shareholder wealth. This brings the conundrum of shareholder returns because are shareholder willing to give up on supernormal returns for what they believe in? Increasingly, the answer seems to be “yes”, and the impact industry and impact investing have been on a growth trajectory.
As per the Global Impact Investing Network (GIIN), the estimated market size of the Impact Investing industry is a as high as ". Impact investing is not philanthropy. Impact investors expect to generate profits at either market level or sometimes, at slightly below market level. As per the GIIN 2020 Impact Investor Survey, 67% of respondents werea iming at risk-adjusted market returns and only 15% had an aim of below market returns or capital preservation.
So, what is the Impact Investing really? It refers specifically to investments that make a positive social and environmental impact on a local, national or global scale. In addition to making financial returns on investment, impact investors focus on how they can make a difference in the world through finances, business ventures, and projects. Impact investing can cover a wide array of topics from sustainability in agriculture, to reducing carbon footprints with technology, to advocating for job security and financial literacy.
In the Gulf region too, this tendency to “invest for good”, is catching up. As per a research paper commissioned by Barclays Private Bank, around USD 1 trillion dollars in private wealth, is likely to be transferred to the next generation by 2030. This new generation is showing a desire to use family wealth for the greater good. Fifty-nine percent of Middle East HNWs say their children have taken the lead on ethical and social investment matters, which is on par with the 56 percent global average . For those who are not already engaging in impact based decisions, 22 percent of the elder generations would like to find out more about their sustainable investment options, and 19 percent are interested in understanding more about investing specifically for positive social and environmental impact.
Banks and financial institutions are also taking a more sustainable approach to their products – but this is currently with a focus on ESG rather that impact. Green bonds, green credit, green sukuks – all are on the rise in the region. First Abu Dhabi Bank has committed to net zero and in 2022 the bank announced its ~213 USD million green issuance this year, following the 500 million euro green bond issued a week earlier. Islamic Development Bank issued a $2.5 billion sustainability sukuk and Arab Petroleum Investments Corporation (APICORP) went to market with its debut green bond of $750 million. Commercial banks are beginning to actively evaluate a green lending portfolio.
The world we live in needs to be long terms sustainable. Something that’s profitable, but not sustainable, just doesn’t grasp as much positive attention any more. Companies and people and lives are deeply connected – the climate change and the Pandemic have both made this very clear. We also have an innate human need to be a part of something that has value. We have been taught that value comes from money, but today, people are realising that money is the numeric expression of something similar to value. Actual value is in how being a part of something makes us feel. It seems like the world is realising that impact, sustainability and being a part of a greater goal, needs to be given its true value.