A History of Impact Investing

Impact investing is a major topic on investors’ radar screens, boasting huge growth, and widespread acceptance among those seeking to align their portfolios with their values. But impact investing has always been more than a fad.

Key Takeaways

  • Socially responsible investing’s origins in the United States began in the 18th century with Methodism, a denomination of Protestant Christianity that eschewed the slave trade, smuggling, and conspicuous consumption, and resisted investments in companies manufacturing liquor or tobacco products or promoting gambling.
  • Socially responsible investing ramped up in the 1960s, when Vietnam War protestors demanded that university endowment funds no longer invest in defense contractors.
  • The combined efforts of protests and responsible investing during the Vietnam War and Apartheid in South Africa, led to institutional and legislative change.
  • Over time, research has backed up this strategy: companies that care about the environment, promote equality among employees, and enforce proper financial guidelines tend to accrue added benefits to investors.

History of Impact Investing

A History of Impact Investing

Investopedia / Sabrina Jiang

Impact investing is also referred to as socially responsible investing (SRI). The practice has a rich history. In Biblical times, ethical investing was mandated by Jewish law. Tzedek (which means justice and equality), comprises rules to correct the imbalances that humans cause. Tzedek is referred to in the first five books of the Bible—collectively called the Pentateuch—thought to have been written by Moses from 1,500 to 1,300 B.C.E. According to Jewish tradition, these rules apply to all aspects of life, including the government and the economy. Ownership carries rights and responsibilities, one of which is to prevent immediate and potential harm.

Several hundred years later, the Qur’an, thought to have been written between 609 and 632 C.E., established guidelines, based on the religious teachings of Islam, which have evolved to what are now Shariah-compliant standards. One of the more common of these standards is called Riba. The overarching goal of Riba is to prevent exploitation. Riba bans usury, and this rule extends to forbidding all interest payments. Rooted in a philosophy that governs the relationship between risk and profit, Shariah law delineates the responsibilities of institutions and individuals. In addition to financial dictates, it also rules out investments in alcohol, pork, gambling, armaments, and gold and silver (other than spot cash, or money that is paid for something immediately).

Origin of Socially Responsible Investing (SRI) in the United States

Socially responsible investing’s origins in the United States began in the 18th century. Methodism—a group of historically related denominations of Protestant Christianity—eschewed the slave trade, smuggling, and conspicuous consumption, and resisted investments in companies manufacturing liquor or tobacco products or promoting gambling.

The Methodists were followed in 1898 by the Quakers, another Protestant denomination. The Quakers forbid investments in slavery and war. Eventually, in 1928, a group in Boston founded the first publicly offered fund, the Pioneer Fund, which had similar restrictions. These early investing strategies applied by these various groups were intended to eliminate so-called “sin” industries. Today, sin stock sectors usually include alcohol, tobacco, gambling, sex-related industries, and weapons manufacturers.

Socially responsible investing ramped up in the 1960s, when Vietnam War protestors demanded that university endowment funds no longer invest in defense contractors. Eventually, the long-standing principles of socially responsible investing came to represent a consistent investment philosophy allied with investors’ concerns. These ranged from avoiding the slave trade, war, apartheid, and supporting fair trade, to issues more common today concerning the ethical impact of environment, social, and corporate governance (ESG).

Pressure From Investors Can Lead to Change

In the process, several success stories emerged. In 1977, Congress passed the Community Reinvestment Act, which forbade discriminatory lending practices in low-income neighborhoods. Repercussions from disasters like Chernobyl in the 1980s spawned anxiety over the environment and climate change, which led to the launch of the U.S. Sustainable Investment Forum (US SIF) in 1984.

Also in the 1980s, American corporate began divesting themselves from South Africa due to the apartheid. Literally meaning "apartness" in Afrikaans, apartheid was meant not only to separate the country’s non-white majority from the white minority but also to reduce black South Africans’ political power. The official South African legislation dates to the passage of the 1913 Natives Land Act. The Act relocated en masse black Africans to "poor homelands and to poorly planned and serviced townships."

In 1985, students at Columbia University in New York led a three-week demonstration, demanding that the University stop investing in companies doing business with South Africa and won. Thanks to the combined efforts of the students and new "ethical criteria" for investments, by 1993, the university was able to redirect $625 billion, an increase of $40 billion from 7 years ago.

And the results were impactful. In 1990, President F.W. de Klerk released Nelson Mandela from prison, and together, developed a new constitution for South Africa. Both men were honored with the Nobel Peace Prize in 1993. The apartheid officially ended two years earlier, in 1991, with the Abolition of Racially Based Land Measures Act.

Institutional Support for Impact Investing

In 2006, the United Nations Principles for Responsible Investment (UN PRI) was released with 63 signatories and $6.5 trillion in assets. By 2021, the UN PRI has over 3,800 signatories and over 121 trillion in assets. The Global Sustainable Investment Alliance (GSIA), a consortium of international sustainable investment organizations, issued its inaugural issue of the Global Sustainable Investment Review in 2012. Adding even more gravitas to the practice of SRI, in 2013, British Prime Minister David Cameron gave a well-received speech on impact investing.

The Bottom Line

Grounded in a history dating back 3,500 years, and driven initially by the idea of doing well by doing good, the scope of impact investing has broadened to encompass global change and generate competitive returns.

In the beginning, socially responsible investing was primarily focused on eliminating investments in products that conflicted with personal belief systems or social, moral, or ethical values (for example weapons, alcohol, tobacco, gambling).

The practice has now evolved into an investing strategy that proactively makes investments in companies that are creating a positive impact. For example, they may focus on companies that demonstrate good stewardship of the environment, maintain responsible relationships with customers, employees, suppliers, and communities, and exhibit conscientious leadership regarding executive pay, internal controls, and shareholder rights. And over time, research has backed up this strategy. Companies that care about the environment, promote equality among employees, and enforce proper financial guidelines tend to accrue added benefits to investors.

James Lumberg is the co-founder and executive vice president of Envestnet. 

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Article Sources

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  1. The Jewish Virtual Library. "Charity (Tzedakah): What is Tzedakah?"

  2. Bible.org. "An Introduction to the Pentateuch."

  3. Sojourners. "Beyond the Letter of the Law: The Jewish Perspective on Ethical Investing and Fossil Fuel Divestment."

  4. Congressional Research Service. "Islamic Finance: Overview and Policy Concerns," Page 1.

  5. Discipleship Ministries, The United Methodist Church. "'Use Of Money' By John Welsey," Download PDF, Pages 4-6.

  6. Natural Investments, LLC. "Quakers and SRI: Some Historic Perspective."

  7. Amundi Asset Management. "Pioneer Fund."

  8. The New York Times. "Protests at Columbia: Students and Issues Have Changed Since the 60's."

  9. The Office of the Comptroller of the Currency. "Community Reinvestment Act (CRA)."

  10. Hong Kong Exchanges and Clearing Limited. "ESG Equity Index Futures: Meeting the Increasing Needs for ESG Investment," Page 2.

  11. The Nebraska Law Review. "The Divestment of United States Companies in South Africa and Apartheid."

  12. History. "Apartheid."

  13. Government of South Africa. "1913 Natives Land Act Centenary."

  14. The New York Times. "Columbia Students to End Anti-Apartheid Protest."

  15. Columbia University Libraries Journals. "Environmental Investment: A Proposal for State Legislation," Page 352.

  16. The Nobel Prize. "F.W. de Klerk, Facts."

  17. Principles for Responsible Investment. "About the PRI," Download Excel Data.

  18. Global Sustainable Investment Alliance. "Global Sustainable Investment Review 2020," Page 7.

  19. GOV.UK. "Prime Minister: "Social Investment Can Be a Great Force for Social Change"."

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