Hello and welcome to the RBC Global Asset Management Navigator Podcast. My name is Mindy Frye, institutional portfolio manager with the Impact Investing Team at RBC. And today I'm joined by Ron Homer, Chief Strategist of US Impact Investing at RBC Global Asset Management. In today's episode of the Navigator Podcast, we're going to discuss impact investing and how the field has evolved over the past 25 years.

Ron, thank you so much for being with us here today. I wanted to talk about how there have been so many changes that have occurred, policy-wise and in the financial industry, since 1998 when you started in community investing. And while most of them have been quite positive, there are a lot of people who still believe that for more positive impact within communities and the environment, there are additional things that need to occur.

And so, I thought today we could talk a bit about what needs to happen in order to maximize the flow of capital to the communities that need it most. And maybe to start that off, it would be helpful if we defined what is impact investing and how you view that as different from ESG investing.

So, impact investing and ESG investing are part of the same family in that they combine investing with social alpha or social goals. The difference is that impact investing is when you are investing for a very specific social outcome as well as a financial return whereas ESG investing is more focused on the process of an outcome. So, you could have any product or any outcome, but you could evaluate it based on environmental, social or governance factors.

So, there is a major difference in that impact investing is very specific. You're looking to combine both an investment alpha and a social alpha under one umbrella.

There's been a ton of backlash on ESG recently, and I was wondering if you could talk a little bit about why you see their controversy in impact and ESG investing.

So, I think the first the concern is, is should investments be agnostic, or should they have values? And so, I think you can take a position on either side of the equation. Unfortunately, some people are taking fairly strong positions, eliminating the other way to look at things. So that's one concern. The second concern is that many people on the investment side feel that by introducing factors other than the pure financial valuation, that you may somehow impair your investment returns.

And then the third, and this more relates to impact investing although it could apply to ESG investing, when people feel that the social goals or the social process, whether it's ESG or the goal on impact investing, is more preeminent than the financial return. So, I think from that standpoint, some of it is a misunderstanding. Some of it may be the way it's been applied by different practitioners.

It's like everything else; you can have some processes that are better than others and so, I think the controversy comes when you conflate some of those issues together. But also, there are many people who may disagree with the measurement of social impact. They may feel that that the social outcome is not important or may even disagree on whether it's a valuable social impact.

Although it's changing over the past 25 years, climate change has been an issue that some people denied and who still deny is related to factors created by mankind versus from natural events. And so, if you start to invest for climate change, to them that would be an oxymoron. So, I think those are some of the reasons why it becomes controversial.

I think it's important for the practitioners of ESG and impact investing to be clear in what their goals are and to be very specific as to why that outcome may be important or why that process may be important, and even more importantly, how it may or may not contribute to financial returns.

Yes, so that brings up an interesting point. Does impact investing have to be concessionary or are there market-driven solutions?

Actually, I think for it to be sustained well in the long term, it has to produce market returns. That's not to say that there's not room for concessionary investing, but usually we call those other things, like subsidies or infrastructure or longer-term investments. In this case, we do a lot of things, usually through governments or social agencies or philanthropy, to create an environment in which capitalism can flourish.

And so, some people will use the term impact investing for setting the ground rules and the framework for more sustainable investment. I happen to think to actually have lasting sustainable impact it has to be market driven.

So, I mentioned in the intro that you've been doing this since 1998, coming up on 25 years, which is pretty remarkable. When you look back, are there any specific milestones or notable things in how the space has evolved over those 25 years?

Well, I think society in general has evolved in the last 25 years. If you take a factor like racial disparities, people have always had a sense of it and an understanding of it. But I think the George Floyd murder, the impact of COVID-19 and its disparate impact on different communities, sort of highlighted those disparities and it caused people to ask the question, how did this happen? How can we change it?

So, whenever people ask questions and are looking for solutions, then I think that opens the door for impact investing, for strategies that can be adopted. Same thing with climate change, as I mentioned, that the amount of people who attributed it to man's own actions versus natural forces has changed. The science has changed over time.

So, all of that has contributed to opportunities to make investments that help solve those issues. I also think that the global movement, the publication of the UN Sustainable Development Goals, have helped crystalize what are social goals and what could be some universal social goals. So, to the extent that you have a set of goals that are adopted universally or near universally, that also helps to provide a framework for making investments that can address those issues.

Thanks, that's really interesting. When you reflect on your 25 years and you look at how things have evolved over time and where we are today, are there specific opportunities that you see in the space that maybe weren't there 25 years ago, or challenges for that matter? I mean, things have evolved, but what would be the opportunities and challenges here?

Oh, there are a number of new opportunities or opportunities that evolve just by the nature of the changes that have taken place in the last 25 years. Look at the impact of the Internet. We now have artificial intelligence. We have a lot more social media, so we have more communication. So, I think one example is the changing demographics. And if you just look at the statistics in terms of the age of the population, so in the US, the white population is getting older and the particularly Hispanic and Latino, Latinx, population is much younger. So over time, those demographics make even a more compelling case for a more inclusive society. So, I think the demographic shifts make the disparities and need to build a more inclusive society more compelling.

And secondly, there’s the nature of our economy. When you have an agrarian economy or an industrial economy strictly, then you need low-cost labor. As you move to a more knowledge-based economy and a consumer-based economy, now you need a better informed, more highly educated, highly skilled population. And to convert that, you need investment, whether it's investment in education or investment in infrastructure.

So, I think the demographics and the ability to communicate and contact people more efficiently will help facilitate impact investment strategies. For example, we have a whole history in this country where immigrants have come, worked their way into homeownership, started businesses, grew communities, and we know that there's a way to do that.

I think some communities have been more underserved because the cost of reaching those communities outweighed the benefits of spending the money to develop those markets. But as I mentioned, because of the changing demographics, the impact overall on our economic condition as a whole, this disparity has become greater. And so, all of that lends itself to having people look at ways to make investments that will help narrow those gaps and create more inclusive societies.

Along those lines, then, do you see, as you look forward, some challenges that impact investors might face?

Well, any time you do something a little differently or you challenge the orthodoxy, or you come up with something new, there'll be blowback. I think you mentioned 25 years; I've gone back even farther than that. And the politics and the values change over time. And so there will be ebbs and flows on investment. But I think these issues are so compelling that the need for collaboration and cooperation and a more inclusive global society will outweigh the temporary obstacles. That's not to say we won't see what we do today where there's a pull back, more nationalism, we see a war in Europe and potential wars in Asia. But over the long term, I guess I'm hopeful that the need to build a common society and a world that we can all live in that is sustainable will outweigh the temporary obstacles.

Well, that's spoken like a true optimist, Ron. Thank you so much for joining us today. I think impact investing has quite a past. It occupies an important place in the investment industry, and I hope that continues to be the case. We appreciate your ability to look back on how far we've come over the past 25 years and to project the future of impact investing as best as we can.

Thank you so much to our listeners for tuning in to this episode of The Navigator. It has been our pleasure.