Back to Portfolio for the Future™

Impact Investing Won’t Save Capitalism, But Its Example Might

By Michael O’Leary and Warren Valdmanis GIIN’s 10th Anniversary report highlights new records, but what’s the endgame? When the Global Impact Investing Network (GIIN) issued its first survey a decade ago, the term “impact investing” had only been coined three years earlier. Just 24 investors responded. In GIIN’s tenth anniversary report released this month, GIIN got nearly 300 responses. It estimates that impact investors now manage over $700 billion globally. For those at the frontiers of reforming capitalism, this growth is heartening. And yet impact investing remains a rounding error on the $83 trillion global equity market. Even if its current growth continued unabated, impact investors wouldn’t control a majority of the economy for another three generations. Consider this: as impact investors, many of us invest in health and wellness. But when Taco Bell makes a taco shell out of Doritos, it sells a million tacos in twenty-four hours. Some of us work to improve jobs at portfolio companies by the hundred or the thousand, but decisions made at a single Uber board meeting affect 3.9 million drivers. Unfortunately—for impact investors and for the rest of us—we have a problem of scale. The Fortune 500 dwarfs the impact investing industry, with over $20 trillion in market value and 29 million employees. And many of those companies remain constrained by a narrow conception of fiduciary duty, preferring to change their marketing than fundamentally reform their business practices. The private equity industry—several orders of magnitude larger than impact investing—employs nine million workers. This implies that impact investors collectively only employ tens of thousands. If impact funds are going to help our economy adjust to the future of work, provide fair compensation, benefits, and conditions for workers, and drive better inclusivity and diversity across companies, it will have to be by example rather than directly. In the fight to reform capitalism, the Fortune 500 will be the real battlefield. So let’s use GIIN’s milestone report to recognize a mathematical certainty: impact investing won’t save capitalism. But its example might. At its best, impact investing is the laboratory in which capitalists work to reform capitalism. No matter how much good we do in our portfolios, we can only achieve systemic change when our best practices are adopted at the world’s largest companies. If we can’t, we risk succumbing to the worst caricature of our movement: small or superficial, good cocktail party fodder but ultimately marginal to capitalism at large. This needs to change. To maximize our influence, impact investors should focus on new business models, scientifically measured, and effectively evangelized. Impact investors must continue to innovate around new business models that directly connect social impact with economic value, dispelling the myth that they are inherently in conflict. Social impact bonds, pioneered by Sir Ronald Cohen, have become a new asset class that links social outcomes with financial return. Socially-minded entrepreneurs are themselves constantly innovating – think of TOMS Shoes and their buy-one-give-one model, or Earnin, which competes with traditional payday lenders under a system where customers pay what they think is fair. All represent the sort of experimentation through which impact investors can drive change. These examples also show how the principles of impact investing apply to a much broader set of industries than just solar panel manufacturers and organic snack companies. Impact investors must show how to build more socially and environmentally responsible companies in our most morally perilous sectors: fast food or fossil fuels, defense manufacturing or mineral extraction. We’re beginning to see some investors back the transition towards more sustainable practices, such as Jeff Ubben’s shareholder activist campaign at the coal-based power company AES Corporation. But to convince the broader world, we need to prove the causal connection between social impact and economic value with more scientific measurement—and we must do so in ways that Fortune 500 companies and traditional investors cannot ignore. Today, we take it on Pollyannaish faith and a handful of correlational studies that “doing well by doing good” is true, but the broader corporate world remains skeptical—a few breathless press releases and sustainability reports notwithstanding. Most companies still view environmental, social, and governance (ESG) standards as risk mitigation strategies rather than core to corporate purpose. Most corporate social responsibility (CSR) professionals are embedded within marketing and investor relations departments—not product development or corporate strategy. Against this, impact investors need to provide the case studies and foundational data that demonstrates how they create economic value not in spite of their social and environmental impact, but because of it. Finally, impact investors need to focus on becoming better evangelists to the broader financial world. Today, two-thirds of Americans do not believe the financial system is benefiting the economy. Fifty years of shareholder supremacy has left workers, consumers, and communities rightfully wary of our corporate sector. By putting social and environmental impact explicitly on the agenda for companies, impact investing offers a better way. Effective evangelization requires more robust conversation between impact investors and our largest public companies, and active participation in helping them to set common standards for ESG measurement and impact best practices. Our hope is that all businesses will ultimately follow impact investors—and that financial markets will reward forward thinking companies that drive long-term value through enlightened stakeholder consideration. Maybe one day, traditional finance will look so much like impact investing, GIIN can issue a report declaring victory and close up shop. In the end, impact investors should be trying to work themselves out of their jobs. We can change the world, but only if we change other investors first. Michael O’Leary and Warren Valdmanis are co-authors of Accountable: The Rise of Citizen Capitalism (HarperCollins, August 2020). They were on the founding team of Bain Capital Double Impact, the firm’s impact investing strategy.

Interested in contributing to Portfolio for the Future? Drop us a line at