Irrespective of one's political background or beliefs, or one's position on the importance of invoking your own values or philosophical or religious beliefs in your investment portfolios, or your social mission, or your considerations of environment social or even governance considerations, it is without question that what appear to be ineluctable global trends in the arena of impact investing are important for you. Either viewed as a response to changing preferences, or the advent of new products, methodologies and approaches, impact investing has grown to be certainly more than an activity important at the margin. When we talk about global trends, the size and the growth rate of the impact sector have to be recognized as being substantial. The bulk of the assets in impact strategies today are generally in funds of publicly traded securities, often mutual funds or exchange traded funds, sovereign wealth funds, defined benefit plans or in the hands or the holdings of individual investors. Investing in funds like this has been possible for almost 100 years. Customarily called socially responsible investing or SRI, it's sometimes known as even an old school methodology for expressing impact. In 2015, according to the Social Investment Forum Foundation, roughly eight trillion dollars was professionally managed in social responsible investment portfolios in the U.S. alone, with a benchmark roughly 40 trillion dollar total assets under professional management in the United States. In other words, 20 percent of all professionally managed assets in the U.S. either managed in a setting in which public investments are hold, investments that are issued into public, into the hands of retail, potentially retail investors or institutional investors, from entities that have gone public, or those that are still private. In other words, who haven't had an initial public offering. For example, shares of private companies amounts to about 20 percent of all managed money in the U.S., in some way incorporating non-financial considerations along the lines of socially responsible investments. Now that doesn't mean that necessarily it's not connected, but what I mean to say is that it is important to understand that there is some consideration of impact. Classically, social impact could be recognized to be generated by any commercial enterprise, and in fact any enterprise whatsoever has some kind of impact in society. But the way we're going to define socially responsible investing, is as a consideration of non-financial elements. They may interact with the financial elements. In some cases it is an open question about whether it induces a cost, a diversification cost, a performance cost, an investment cost, which may contrast with what we're going to ultimately define as fiduciary duty. Or it may not invoke costs or necessarily impinge as the typical concern might usually be expressed, notions of fiduciary duty. Over the last two decades, sustainable and responsible investing grew approximately 14 times. In the several years, two years in fact preceding December 31, 2015, it grew about 33 percent. At the end of that year there were about 1000 investment funds in the U.S. that considered environmental social or corporate governance criteria. With total assets in that subset alone of about 2.6 trillion dollars. Recently popular, we find that new funds offering ESG exposure to alternative investments, in other words, risk diversifying beyond stocks and bonds, have arisen. This is no recent fad as the data suggests. For example, about 15 years ago in a poll by the Opinion Research Council at the University of Chicago sponsored by essentially a religious oriented fun complex, MMA Praxis, a Lutheran fund complex, suggests that about 50 percent of U.S. investors said that they take social criteria into account when making their investment decisions. We repeated this survey just this last year in 2016 here at Wharton, in our behavioral labs, and more generally in surveys, and we find essentially the same results. Half of those who hold investments in the United States, say that they do or would like to take social criteria into account when making their investment decisions. They want to have impact with how they invest. They want to matter in the world. Now the notion of the calculation or the question of whether there is a cost to pursuing ESG or SRI kinds of notions in a investment portfolio, have got to include the question of whether new asset classes are being brought to bear. On the one hand, the ever present simple notion of investment constraints, avoiding a kind of investment that you don't like, or over allocating relative to what other otherwise might be optimal, a particular investment as a result of your personal impact preferences, might imply a constraint. However, if especially over time, new asset classes, new methodologies, new approaches, are born, it may be the case that those new asset classes, those new investment products and so on, have a chance of expanding the investment opportunity set which might otherwise be constrained. In a subsequent lecture, for example, we'll talk about the base of the pyramid investing. The classical defined benefit or defined contribution retirement portfolios, have historically not held much of the investments or investment risk of allocating to those who are ultimately entrepreneurs, yet at the base of the pyramid around the world. You could think that's a constraint with new asset classes arising to combat the constraint, to open the investment opportunity set. The proliferation of impact investing into new asset classes and products has essentially transformed the scope of the social investment discipline. Beyond the time tested discipline of positive and negative screenings to stocks, screening out because you don't, well for a number of reasons, you may not want to have an association, or own the shares of a particular commercial enterprise, or have an ownership interest in any form. Or again, you may want to pursue particular kinds of investments with an over allocation. Some impact managers saw that other asset classes were ripe for impact strategies. The first SRI bond funds for example, were recreated by specialized SRI managers Calvert and Dommett years ago. Today, larger fixed income managers like PIMCO have SRI ESG bond funds. Asset, subclasses and fixed income also have SRI funds. Municipal, environmental and social government funds now exist. ESG high yield funds, funds run by Pax World, Columbia Threadneedle and one other managers Ameriprise, including customized approaches at wealth managers, some of the biggest banks in the world, Bank of America for example, as well as smaller family offices like Threshold group, Teton and asset management and others. At the cutting edge, perhaps not available in public funds, are strategies involving new types of bonds such as development of green bonds, bonds funding alternative energy infrastructure and insurance bonds known as Cat Bonds or Catastrophic reinsurance bonds, incorporating expected risk from climate change or in fact, sharing risks from parts of the population which are otherwise exposed to personal or demographic challenges, or those challenges arising from difficult states of nature including sharing the risk of life insurance offered to those who may be HIV positive. Infrastructure is an ancient class. Think building the Erie Canal or think building pyramids in Egypt but is newly popular among institutional investors because of the potential for bond like returns and lack of correlation with public markets in some context, although in some context, those correlations can be high. ESG elements can be incorporated infrastructure financing fairly readily. The ESG label is so desirable that today some investments are putting on the label even though they aren't really ESG. For example, I know of a financial startup that is marketing itself as a socially responsible payday lender. I'm surprised no one has yet come up with any ESG rationale for cryptocurrency investments. Perhaps this would be a student project at one point. Training financial industry professionals in ESG discipline although I might be biased, I think the institutionalization of learning about impact in ESG strategies is at the heart of the growth in the global phenomenon. Until recently, say a decade ago, the impact community was small and tight knit, intended to share certain beliefs about the social purpose investments for example like religious and antiwar values like I mentioned earlier. In fact, when we traced the very ancient antecedents and predicates for impact investing, we find evidence of contracts having been signed as odes to the god in Sumerian temples. Professional training was a function of socialization in the community and now today an active conference schedule. Then the leading business schools began offering impact courses. In most cases, this was bottom up driven by demand from students who had formed social investing groups often focused on microfinance but now has become recognized across the top schools as a stable and important part of the curriculum and in fact, like at Wharton as you probably well know, we have a Dean of Impact. All of the M7 schools are now offering courses as I described. My personal observation focuses especially on demand element. In addition to academic education, there's industry outreach, continued education well funded, large asset managers building interest in the space. And in fact, today has been a career fast track here at Wharton and elsewhere, for young people who have made it a priority in their education and early career learning experiences. Now, it's important to mention the role of large investors and family offices in global ESG. I'm speaking of pension plans, sovereign wealth funds, large so-called offices who coordinate the investment and other activities of ultra high net worth families and investors. All of which, at some point, have become to be substantial players in the impact investing space but also who in some arenas are those entities, firms and people who struggle with the notion of fiduciary duty. The idea of potentially putting the best financial consideration or the financial benefit of those beneficiaries, asset owners whose investments are overseen by fiduciaries. Entry of pension plans and those other large investors like sovereign wealth funds into ESG investing has now become a watershed for investing in the global impact agenda. Why? Because the pension sector and the sovereign wealth fund sector is so big. For example, United States alone, as of the most recently available data in September 2016, US retirement plan assets were over 25 trillion dollars according to the ICI, the Investment Company Institute. Today, US invested assets stand at about 40 trillion or so, 40 to 45 trillion so 63 percent of U.S. investment assets are in retirement plans. Of that roughly 25 trillion dollars, about 33 percent, about 8.2 trillion was in Defined Benefit, DB plans which pay benefits according to a set formula in their essence. Most of the rest, almost 15 trillion, was in Individual Retirement Accounts, IRAs or other kinds of defined contribution plans such as 401Ks, 403 B's, 457 and other related programs, in which parties make their own investment decisions usually from a menu of mutual funds, exchange traded funds and others and pay out depends on individual investment performance. Many 401k and other self directed plans in the US, now offer ESG fund options. Pension plans outside the US also do SRI. In 2014, total private pension assets in the OECD, The Organization for Economic Co-operation and Development, exceeded thirty eight trillion dollars. Over the past several years, European governments and pension plans have moved decisively to integrate SRI into an awesome policy. For example, the perhaps second largest sovereign wealth fund in the world or at least one of the top five and Europe's largest sovereign wealth fund, The Oslo Norway Oil Fund is part of the Norgas complex, let's say by listing in the public press 800 billion dollars or more, documented 66 companies it had divested from due to their carbon emissions level. Let me repeat that, the Norway Oil Fund divested from essentially, energy companies, ABP to Dutch civil service pension plan, roughly around 400 billion in size in US dollar equivalent is making every company's portfolios reapply for ownership or position of the fund showing social responsibility and sustainability. ABP's goal is to reduce carbon footprint within its holdings, by 25 percent by 2020 and double investments in clean tech renewables and recycling to over 60 billion dollars over the next five years. In 2015, France became the first country to mandate ESG reporting by institutional investors. As of the beginning of 2016, the mandate kicked in although investors have until June 2017 to have delivered the required info. ESG oriented investing techniques have spread from public equities into fixed income and private equity with governments around the world attempting to manage, in fact, micromanage government employee pensions approach to ESG potentially for political reasons.
