These have been uncertain and unprecedented times for markets and investors alike. The S&P 500 ended 2022 down (19.44) percent, its worst result since 2008. The MSCI ACWI lost (18.14) percent last year. U.S. bond funds experienced some of their worst performances ever. Private equity and venture capital also stumbled. Indeed, the only seemingly “safe” place to be in 2022 was real estate, yet even that sector is expected to experience headwinds in 2023.
This year is off to a rocky start. Global political and economic uncertainty abounds. Everything from crypto to gilt has experienced turbulence. At the same time, the U.S. Federal Reserve is continuing with an unprecedented series of rate hikes as it seeks to put a cap on inflation. Unemployment is at a pre-pandemic low of 3.4 percent, but interest rates and living costs continue to rise, workers continue to leave the job market, and pockets of the economy are experiencing labor shortages.
In short, the day-to-day reality for all investors is unsettling. As an older millennial, I remember the market meltdown of 2008. I was a senior member of the investment team for a hedge fund of funds business based in Chicago. Market dislocations and structural shifts combined with fraud and a banking crisis that hobbled prime brokerage left hedge fund investors bereft. Many left the market entirely[IRS2] . However, those investors who maintained a long-term perspective, stayed disciplined in their diligence process, and utilized risk management tools were able to continue investing in what turned out to be an attractive entry point.
The consensus playbook for times like this focuses on preserving dry powder, lowering exposure, reducing risk, and rebalancing portfolios. The emphasis is on sticking with what you know – re-upping with existing managers rather than new managers and innovation. This defensive approach is prudent but not compelling for most impact investors today. The future demands that we continue addressing our most urgent social and environmental issues, and history shows us that intentionally taking risks during these times can produce outsized financial gains.
As a result of the current upheavals in everything from health equity to housing, we are likely to see even more impact investing opportunities, just as we did in the aftermath of 2008. Moving along the risk continuum from lowest to highest risk, these investments include private credit for alternative yield products (including CDFIs), sustainable agriculture, affordable housing, non-dilutive financing for bridge rounds in high-impact venture businesses, investing in new impact managers (taking smaller bets to address risk or using a fund of funds to diversify), investing in climate adaption, focusing catalytic capital on geographies or communities most in need of upskilling or reskilling, and helping impact investment firms scale investing in nascent climate technologies. And those investment options – if prudently selected with the right risk return profile and robust due diligence – should be positioned to hold up well and (depending on the strategy) even outperform over a long-term investment cycle.
At the same time, there will be no limit to the need for impact investing. Social and environmental problems that impact investing seeks to solve are only likely to grow larger in the coming months and years. Even more so because we know that the economically vulnerable – those that impact investing aims most directly to help – are on the front lines of the coming crisis. And global inequality is a major contributor to what ails the economy. Evidence suggests that even as mainstream institutional and retail investors express interest in combating climate change, their low risk approach will result in a decreased commitment to all but the most proven climate solutions, causing overall climate investment to plateau.
More importantly, investing with impact in this moment is essential to continuing the transformation of our financial system. Our investments drive impact not just through each company’s products, services, and management practices, but also in demonstrating that optimizing potential impact alongside all other dimensions of risk can produce strong returns. With that, a multiplier effect ensues as more capital invests with this objective. This includes those who would like to see more women and BOPIC founders and investment professionals: impact investing needs capital willing to take risks with new teams and firms.
To pause our capital deployment risks pausing the growing evidence that this is fundamentally a more sophisticated way to invest, a way to get more from our capital. Impact investors should have the confidence to stick to their convictions and stay the course even in these uncertain times. The need, and therefore the opportunity, has never been greater. And with prudent risk management and a long-term time horizon, investors don’t need to let the current market conditions cause them to limit their commitment to impact.
Subscribe to our free monthly newsletter for more about impact investing.