2022 in review: Impact themes
Markets in 2022 were driven largely by rising inflation and the subsequent aggressive actions of the Federal Reserve (the Fed). Rapid and substantial rate hikes created significant headwinds for fixed income investors over the course of the year, resulting in drastically negative returns not seen in the bond market for decades. Despite the uncertainty and volatility, impact investors continued to show support for strategies that seek both competitive financial returns and positive social or environmental impacts. Several themes persisted as high priorities for impact investors this year:
Diversity, Equity & Inclusion (DEI): Increasing the flow of capital to BIPOC communities
Many investors are motivated to address the systemic racial injustice and inequity experienced by Black, Indigenous and People of Color (BIPOC) individuals and communities. The racial wealth gap has persisted, disadvantaging BIPOC families, individuals and communities of economic power and prospects. Homeownership tends to account for a large proportion of American families’ wealth, but Black and Latinx families are significantly less likely to be homeowners. For example, only 44% of Black Americans owned homes in early 2020 while 73.7% of white Americans did, a gap of nearly 30 percentage points2. One significant trend that we have seen over the past several years is that large corporations are seeking to align a portion of their balance sheet assets with internal DEI goals. In doing so, corporations are able to support local communities where their employees, customers and suppliers live, focusing on specific groups like LMI individuals or underserved BIPOC populations. Confronting the economic disparities that BIPOC Americans face today will require comprehensive efforts that extend beyond philanthropy. Impact investing can be a part of the solution by leveraging the capital markets and deploying investment dollars to support upward economic mobility for underserved families.
More on the causes of wealth inequity
Climate change and its disproportionate impact on underserved populations
Unsurprisingly, climate change has continued to wreak havoc on communities worldwide. In 2022 alone there were 66,255 fires in the United States, burning a total of 7.5 million acres of land.3 Wildfires are responsible for disruptions to transportation, communications, power and gas services, and water supply. They can also lead to deterioration of air quality and animal and human health as well as loss of property, resources, and perhaps most critically, loss of life.4 And while humankind broadly is impacted, our most vulnerable populations bear the brunt of these losses.
Paradise, California is the story of how climate risks can trap LMI communities in a cycle of economic instability – and underscores why investors may seek to invest in solutions that directly help these communities.
There were 66,255 fires in the United States, burning a total of 7.5 million acres of land. Wildfires are responsible for disruptions to transportation, communications, power and gas services, and water supply.
In 2018, California’s deadliest and most destructive wildfire (donned the Camp Fire) ravaged Paradise, burning down 90 percent of its structures and displacing up to 50,000 residents. Because of California’s affordable housing shortage, many of these residents were already economically disadvantaged – like any number of other LMI individuals around the country, they could afford housing in Paradise in large part because of the very climate risks threatening to take that housing away. What’s more, these conditions meant Paradise’s LMI residents couldn’t afford to self-insure, and even if they could, rising housing costs in the area meant they often couldn’t purchase a house with the insurance money they received.
As a result, large numbers of displaced residents faced housing instability. On the eve of the initial pandemic lockdown, for instance, 23% of unsheltered people in all of Butte County (home to Paradise and neighboring areas) were homeless because of the Camp Fire.
The impact of climate change on LMI communities is substantial and will not be solved by any single approach. It will take concerted efforts from government, philanthropy, individuals, and the private sector. Investors can also be part of the solution. Fixed income investment strategies exist that can directly address climate change’s impact on communities like Paradise – rather than support the companies who, more often than not, are part of the problem. New, climate-focused investment solutions are out there and growing in number, and most will directly address climate risk and the LMI individuals who are most vulnerable to those risks. For us to maximize our full impact investing potential, investors need to sift through all the noise and ensure their dollars go towards the most meaningful solutions. Read more on this topic.
Community investing/geographic targeting
Investors continue to show interest in geographically targeting their impact investing dollars, a strategy often referred to as Community Investing. Despite record levels of volatility in the marketplace in 2022, interest in strategies with the capacity to do this type of investing persisted. RBC GAM believes that we can help build stronger communities and build portfolios of high-quality securities that meet investors’ needs while increasing the flow of capital to designated communities. Groups of likeminded investors who share a common goal around specific communities (for example community foundations and public entities serving a specific geography) have continued to band together creating Regional Impact Investment Collaborations. This coordinated approach provides an opportunity for investors to create additional scale by pooling assets and targeting them in the areas they care most about. These collaborations have continued to thrive at RBC GAM.