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December 27, 2018

Jim O’Neill: time to embrace the ‘exciting future’ of impact investing

By Spear's

The rise and rise of impact investing has brought us to  ‘the edge of a seismic shift’, says economist Jim O’Neill

A growing trend in the investment world is that generally referred to as ‘impact investing’, in which investments are determined not just by the anticipation of a monetary profit but also by a perception of some broader social benefit. Until the past year or so, it has been primarily a specialist field where a few pioneering investors have been enthusiastic to use finance to solve societal problems, but now it seems that larger investment managers are trying to get involved.

At its core, this trend is establishing itself as there are so many entrenched social challenges, within or across nations, that finance professionals with a desire to see better lives for others are turning their attention to what they hope will give a more satisfactory purpose to their jobs.

A lot of the impetus comes from those with philanthropic intentions, but it is starting to attract others who simply believe that modern financial markets serve only the interests of a few. One of the most successful macro hedge fund investors, Paul Tudor Jones, has been focusing on ‘Just Capital’ in recent years, and in June he was at the centre of the launch of a social impact ETF.

I have a growing suspicion that we are on the edge of a seismic shift in not only how investing takes place, but also how modern companies drive their existence. Let’s call it a shift from being driven by profit for the sake of profit, to profit with purpose. And I suspect, as part of this shift, companies will move way beyond having ‘corporate and social responsibility’ (CSR) divisions to embedding better purpose and principles in their activities.

Why is this shift occurring, and why do I think it is such a big trend shift coming? There are many different – small – reasons, but at the core there is one: the post-2008-crisis world of finance and international business is simply not sustainable. Superficially, the world economy probably had its strongest period since 2008 in the 12 months from mid-2017 to mid-2018. Many equity markets – until recently – had achieved new records, and life just carried on.

Well, below the surface, yet again those signs of strong world growth are turning out to be quite flimsy. The apparently ever-resilient equity markets appear to be quite sensitive not only to threats to international trade, but especially to the removal of the staggeringly generous amounts of liquidity that central banks have had on tap – and of course, with it, the challenge from higher interest rates. Then, below this, there is the evidence of inequality and the belief that very few have shared in any post-2008 wealth gains.

My own thinking has evolved since I left full-time finance. Until 2013 I was still working at Goldman Sachs, and I had spent close to the previous 20 years immersed in my life there. This included the years building up to the 2007-08 crisis, and the immediate aftermath. When I chose to leave, it seemed to me extremely clear that life was not only unlikely to be ever the same in the lofty world of investment banking, but nor should it be.

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In one media interview, I found myself saying that ‘not enough people went on the Tube’ when I was asked what my biggest misgiving about the culture at GS was. This was my way of suggesting that too many of my generally wonderful colleagues didn’t really connect with people outside their immediate world.

Among the few things I have given my time to since I left was leading a review into global antimicrobial resistance (AMR) for the then Prime Minister, David Cameron. I frequently say it is possibly the most interesting thing I have ever done professionally. There are many reasons why I enjoyed it so much, but at the core it was because my small team were literally tasked with recommending ideas for solving a truly global challenge that affected all seven billion-plus of us, and it didn’t distinguish between colour, sex, race, religion. If we don’t find new effective antibiotics, and stop misusing the diminishing current ones, all of us will suffer, in some cases badly.

My review recommended 27 specific policy actions, which would require $42 billion over a ten-year period to implement. That’s a lot of money, but less than 0.1 per cent of global GDP – and, crucially, it’s less than the amount the top three US pharmaceutical companies have spent buying back their own shares so far this decade. None of the three is active in the search for new antibiotics, as they perceive it as costly and not likely to generate profits. Can this be right, and is it sustainable?

Leading businesses, who are among the few that have the knowhow to produce, distribute and preserve antibiotics, spend more money buying their own equity than the cost of ensuring AMR disappears from the vocabulary. I believe large pharmaceutical companies need to discover ‘enlightened self-interest’.

If you go beyond the pharma industry, you will discover that share buy-backs are not only part of daily corporate business management life, but so much so that in the past decade, corporations buying their own shares are the biggest source of equity-buying that takes place, at a time where most developed countries’ true investment in their own businesses – and others – is weak.

This is not sustainable. Companies need to discover a truer, more lasting and rewarding purpose, and I believe we are in the earliest days of this exciting future.

Jim O’Neill, Baron O’Neill of Gatley is a British economist and former former chairman of Goldman Sachs Asset Management and former Conservative government minister.

This piece originally appeared in issue 64 of Spear’s magazine. 

Image credit: CC0 Creative Commons 

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