A few years ago, Dan Madhavan observed that impact investing was a three-hour film and we were only 10 minutes in. It’s the kind of comment that leads in only one direction – are we further into the movie now? Are we sitting more comfortably? Is the plot making sense? Dan ponders for a moment. As CEO of Impact Investment Group, he sees it all in close-up and in vivid colour. But he thinks we’re certainly past the film’s 10-minute mark, even if there is still a fair dose of expectation about where we go from here.
Dan Madhavan, CEO Impact Investment Group
“We’ve come a lot further with impact investing than people, me included, would have expected a few years ago,’’ Dan says. “Is it developing in the way that I think everyone would have hoped? I think you’ll get a mixed response on that question.’’
Six years ago, Dan started his own impact investing journey, leaving JB Were to find the best way to turn his skills and experience to “…something other than just making money.’’ At that time, by Dan’s reckoning, there were perhaps only three organisations devoted to impact investing in Australia and the first social impact bond had just been issued.
Fast forward six years and the landscape has changed, reflected in the increase in the numbers of those operating in the impact investment space. “It’s starting the penetrate the mainstream conversation,’’ Dan says. “We are talking to advisors who don’t come from just an ethical advisor background, who are focussed on this. These are mainstream wealth management firms who are getting more and more interest from their clients about ethical or impact investing. As well as that, you’re seeing these larger institutions starting to develop an impact product or say they’re developing it and joining impact investing roundtables and conversations that they weren’t part of six years ago.’’
Not only that but last year the Federal government established a social impact investing taskforce, featuring an expert panel chaired by Michael Traill with Philanthropy Australia co-chair Amanda Miller, which presented an interim report at the end of January.
But for all of that acknowledged growth and increased awareness, impact investing still occupies a modest spot on the nation’s investment landscape. IIG data shows that the total funds under professional management in Australia is estimated at $2.25 trillion. Impact investments total is less than one per cent of that, or about $19 billion. It points to a huge opportunity for growth.
The path ahead though is not without its challenges. Dan has a deeply considered view about what the future of impact investing in Australia looks like – its difficulties and opportunities, and only some of it has to do with shifting investment from one column to another. Dan believes it’s important to understand impact investing’s limitations, most pertinently, that it is an activity that doesn’t yet sit at the forefront of the broader investment strategies.
“For most of us in the impact investing space, we’re on the frontier, we’re pushing the boundaries,’’ Dan explains. “I think there’s an important role for us to play in imagining, reimagining, demonstrating and pioneering and showing what’s possible but the real scale and leadership that’s required at this time isn’t at the margin, it’s at the centre.’’
“So how does the chair or the CIOs of our largest super funds, for example, what do they think about not just their fiduciary duties but also the purpose of the capital, what it could be used for,’’ Dan says. “Our corporate leaders, what do they think about their obligation to their shareholders and what their obligation to their staff members are and the communities that staff belong to? How do they balance that? I don’t for a second say that because I think that’s easy, I say it because I think that’s really hard.’’
For all of the difficulties, there are shifts in thinking behind the growing legitimacy of impact investing that are more to do with longer-term societal changes than a passing fad.
One of them is the increased engagement with social causes among Generation Z and millennials, whose desire to see corporate social responsibility taken seriously is often a key determinant in their employment choices. Dan saw the trend in sharp relief several years ago when he was part of a group responsible for GoldmanSachs JBWeres’ graduate program. “I saw the [graduates’] questions change – it went from what do I get paid, what experience do I get, where do I get rotated to, who do I work for, to tell me about your corporate giving program, your corporate social responsibility program, your volunteering program? It was like where are these questions coming from? There’s a very different mindset,’’ Dan explains.
One of the other key factors is the role of women in the workforce and the consequences for investment options. “I think we’re still grappling both the difference of more women in the workforce and the impact of transfer of wealth to women is having,’’ Dan says.
“All the research shows that women are more inclined to bring values into their investment decision-making process. I think we’re the first generation where wealth will transfer 50/50. Before this generation, it would go to the sons, and in particular the eldest son. So that mix is very different from what it was 50 or 100 years ago.’’
There is also another element in the mix, one that has perhaps come into sharper focus during the COVID-19 pandemic – and that’s the decisions we make, about the way we live and the impact we have individually on the broader community. It’s as simple as thinking about where you buy groceries – from a local or independent supermarket or one of the big two. And at a micro level, where those products come from – local, national or overseas. An increasing number of families, including Dan’s, are showing that they care more about those kinds of choices.
Choices, at all levels, make a difference. It’s fundamentally true of how those choices drive investment. “I don’t want to make it sound that investing is the be-all and end-all of how we respond to this [pandemic] – but it does matter,’’ Dan says. “Capital – we live in a capitalist system, so capital has a very large role to play, in the same way we live in a democratic system so democracy has a large role to play. In this system, the current field of impact investing will not get us anywhere close to where we need to be – it may be able to play a leadership role in what a response looks like and help us imagine what a response might look like, but of itself, the size of the field cannot shift enough capital to respond on its own. ‘’
Allowing for that opportunity for impact investing to act as a collaborator with government and philanthropy to make a difference, there are still some important philosophical considerations which are central to Dan’s thinking about impact investing.
“I think there is a question that we are not asking each other enough, and that question is……what’s the trade-off we’re ignoring?
I’m not the first to raise this, but just because we know it’s a valid question, doesn’t mean we really engage with it: We have built a world on so many assumptions that have costs we don’t want to talk about. We pretend our growth at all cost mentality is a growth with no cost miracle. It is not. So how do we face into the truth of that? If we do then it may have implications for industries, jobs, buying behaviours, lifestyles and many other aspects of our lives. And yes, that may include implications for our investment returns. How important are these things to us? Are they worth the cost? What are we prepared to give up? If we ask ourselves that question more often…and confront that difficulty…[then] at least our impact will be more honestly framed in our choices,’’ Dan says.