Impact investing that may once have been an abstract concept to U.S. public pension funds and other institutional investors is becoming more real during the unprecedented market and social disruptions caused by the COVID-19 crisis, advocates say.
"Arguably this is a time that everyone who has either been in impact investing or looking to get into impact investing is very attuned to. I think there is a very clear acknowledgment that the time to invest is now," said Rekha Unnithan, managing director and co-head of private markets impact investing at Nuveen, with $5.5 billion in public and private impact investments under management.
Amit Bouri, CEO and co-founder of the Global Impact Investing Network in New York, agreed. "Many investors will be sticking to their knitting, but as the dust is settling, we are already seeing a number of investors looking at how they can allocate capital, and where they should be," he said. The GIIN estimates that the global impact investing market was $502 billion as of 2019, with sizable growth from new entrants. Nearly three-fifths of all respondents to the GIIN's 2019 survey entered the market over the last 10 years, and nearly a quarter made their first impact investment within the last five years.
This latest increased interest in impact investing due to the coronavirus pandemic may not fit neatly into that bucket, given the unprecedented speed and breadth of the pandemic's reach and the needs cre- ated by it, but it does fall under the broader category of sustainable, responsible and impact investing, which in 2018 represented 1 in 4 dollars under professional management in the United States, according to the US SIF Foundation.
Illinois Treasurer Michael W. Frerichs prefers to call it sustainable investing because "pension funds are long-term investors. The pandemic has strengthened our resolve here," said Mr. Frerichs, the state's chief investment officer and a trustee on the Illinois State Board of Investment overseeing $19.3 billion in defined benefit retirement assets. He sees the crisis leading to a "slow sea change" in companies' attitudes about their responsibility to all stakeholders, including local communities.
Illinois is part of a coalition of 195 long-term institutional investors with $4.7 trillion in assets that recently reminded companies that their long-term viability is inextricably tied to the welfare of all stakeholders, including employees, suppliers, customers and communities. The coalition pledged to engage the companies "to use their power as a force for tremendous good" during the crisis.
"Rising inequality changes when enough investors insist it is going to change," Mr. Frerichs said.
For public pension funds, the pressing needs now brought to the forefront — such as disproportionate impacts on lower-income communities, access to capital and worker health and safety — could mean a shift away from current ESG interests.
For ESG leaders like the $226.9 billion California State Teachers' Retirement System, West Sacramento, the $372.9 billion California Public Employees' Retirement System, Sacramento, and the $225.9 billion New York State Common Retirement Fund, Albany, "the pressure on those plans to move to broader social impact investing is going to increase dramatically and move beyond ESG," said Christina Leijonhufvud, a managing director at Tideline, an impact investing consultant in New York.
It is not likely to be an immediate shift, considering the pressure on public pension funds in particular to first address their own portfolios and funding demands, as well as the pandemic's economic impact on states as the result of falling tax receipts and growing safety net program spending.
Still, "I can see a large public pension plan funding (impact-related investments) because their constituents are there. It's an opportunity to evaluate in a new way," Nuveen's Ms. Unnithan said.
"There is bound to be significant increase in the 'think local' movement," said Fran Seegull, executive director of the U.S. Impact Investing Alliance in New York, an organization working to build an impact investment ecosystem in the U.S.
"The recovery for the U.S. is not a recovery for the 1%. A more inclusive approach is also part of the path forward. And we feel that will directly benefit pension plans, especially public pension funds for teachers, nurses, firefighters. We really see that it is a rupture moment" in terms of a focus on income inequality, Ms. Seegull said.
Traditional impact investors like foundations are expected to lead the way, while also spending more on grants to help communities deal with the most urgent needs. "These are all conversations investors are working through now. How much they push forward will depend on how much is in place (to invest in.) There is no shortage of people raising their hands," said Tom Mitchell, a managing director with Cambridge Associates in Washington who deals with impact investing.
Although direct impact investments related to the crisis have been limited so far, some investor actions that have been put in place "can push the conversation forward," said Justin Conway, vice president of investment partnerships at Calvert Impact Capital in Bethesda, Md., who said clients are actively questioning how portfolios and companies are going to weather the storm.
He cited moves by a group of 21 Catholic organizations worldwide that represent $40 billion in assets, which aligned portfolios for COVID-19 impact-related opportunities in April. Mr. Conway said clients are actively questioning how portfolios and companies are going to weather the storm.
He and others predict more emphasis on community development and innovation to prepare for a new economy. "Impact investors are good at working collaboratively. Innovations that are going to scale are really going to get attention," he said.
NEPC LLC partner Kristine Pelletier in Boston, co-head of its impact investing committee, thinks that impact-minded investors "may open their vision internally as a result of this crisis," possibly shifting to new areas like food security, education delivery and health care, while investment managers will focus more on strategies that have real impact. Ms. Pelletier and others also expect the global crisis to underline the need for impact metrics from money managers. "The impact investing market is clamoring for that," she said.
When it comes to crisis-related demands like getting people back to work and strengthening the health care system or food chain, "if you are a big pension fund thinking about long-term financial performance … I think we are going to see a much broader focus on stakeholders, and discipline on how you manage your impact investing," GIIN's Mr. Bouri said.
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