Image by John Ritter

Image by John Ritter

An estimated $30 trillion in assets worldwide—including half of all professionally managed assets in Europe—are already evaluated through environmental, social, and governance (ESG) or impact screens, leaving no doubt that investing for impact has hit the mainstream. In spite of a host of complicating factors, from a basic lack of defined terms to the difficulty of measuring returns, demand is only going up. In response, HBS finance professor Shawn Cole and senior lecturer Vikram Gandhi, a practitioner in investment banking and impact investing, developed a new second-year course: Investing—Risk, Return, and Impact. Here, they talk about preparing the next generation of investors for maximum impact.

This movement is a decade old. Where does it stand?

Shawn Cole: Investing for impact is extremely widespread. CEOs or asset managers would say, “Of course, we need to have a holistic view of ESG.” But in my view this reality has not yet been sufficiently reflected in our finance courses at HBS. So we’re trying to bring this important phenomenon from the real world to the classroom, recognizing that this is an increasingly important set of skills for our students. We’re fully convinced this is going to be fundamental mainstream investing in 20 years.

Vikram Gandhi: One key driver is investor demand.If you look at the big pools of capital—family offices, pension plans, insurance companies, sovereign wealth funds—the owners of those assets are putting pressure on intermediaries to do more with the companies that they’ve invested in. That’s in both the public and the private markets. And so at this point I don’t think it’s a question of whether this is niche or mainstream. The challenge is how to translate this intent into action.

Which means measuring impact, in other words?

VG: A lot of our research is around measurement: how to think about it, how to track impact over a period of time, how to compare the impact of different investments just as you would compare financial returns. The intent is there, the question is how to make it happen in practice. That’s on the private market side.

On the public side, the question is how you can influence the behavior of a company to reflect your values, or protect the long-term value of your investment—or both—while only owning a small percentage of it. A lot of our course is about shareholder engagement: How can shareholders move the needle? One example that Shawn and I worked on was with CalSTRS, the California pension plan for educators. Following the increase in school shootings, there was a lot of pressure on CalSTRS to get rid of its ownership of gun stocks. But another approach is to hold the stock and try to change behavior. One of our students actually convened people from CalSTRS and 10 other investors on campus last May, and together they came up with a set of principles for a responsible firearms industry, with a focus on improving the safety of guns and making sure that point-of-sale checks are done correctly.

SC: That’s an especially exciting example because we taught a module on public markets engagement in the spring, and then by the fall we had a new case study about the student who had organized this movement and helped establish these principles. It made a difference in the world in such a short time frame, which speaks to how dynamic this space is and how motivated the students are to bring about change.

What will the picture look like in another decade?

VG: Historically, much social investing on the private side incorporated subsidized returns, with the goal of making a difference in important societal issues. That’s an extended form of philanthropy in my view, and I think you’ll see a bigger pool of capital engaged in that way. We also expect to see the growth of market-return private equity funds where there is collinearity in financial returns and impact in the business model of investee companies. Quite a few of the large, global PE firms have launched impact funds over the last year.

On the public side, I think ESG will become core to any financial analysis, just as you would consider revenue sales, cost of goods sold, and employee costs. Eventually we won’t have a separate discussion about whether we should factor in ESG. There’s also a massive amount of learning that can be done among asset owners. There’s a lot of intent, but people don’t know how to execute, implement, and measure it. So bridging that gap and creating educational material around that is going to be another big step forward.

SC: Another hope is that some of the material that we teach in this course could eventually move into the first-year finance curriculum. For this generation of students it’s sometimes said that work is almost the new religion. It’s important to them to do something really meaningful and to contribute to society right out of HBS. Our alumni are already leaders in this field, and I think that trend will accelerate.

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