A History of Impact Investing

Impact investing, or socially responsible investing, is a major topic on investors’ radar screens. Ethical investing principles boast 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 protesters demanded that university endowment funds no longer invest in defense contractors.
• The combined efforts of protests and responsible investing during the Vietnam War and the apartheid regime 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

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 Torah, also called the Pentateuch by Christians—thought to have been written by Moses from 1,500 to 1,300 B.C. 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 A.D., established guidelines, based on the religious teachings of Islam, which have evolved to what are now sharia-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, sharia law delineates the responsibilities of institutions and individuals. In addition to financial dictates, it also rules out investments in things prohibited in the Quran such as alcohol, pork, and gambling.

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.

Another Christian denomination in early America were the Quakers. Their religion began in the 1600s in England, and Quaker groups were meeting in America as early as 1688. The Quakers forbid investments in slavery and war.

Fast forwarding to the modern era, the Boston-based Pioneer Fund, founded in 1928, began to adopt socially responsible investing in the 1950s. 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 protesters 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) investing.

$3.5 Trillion

The combined value of all sustainable funds worldwide, as of June 2024.

Pressure from Investors Can Lead to Change

In the process, several success stories emerged. In 1977, Congress passed the Community Reinvestment Act, a law that forbade discriminatory lending practices in low-income neighborhoods. In the 1980s, anxiety over the environment and climate change motivated the launch of the U.S. Sustainable Investment Forum (US SIF) in 1984.

Also culminating in the 1980s and beginning even earlier, American corporations and universities began divesting themselves from South Africa due to 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. That law 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. They 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 seven years earlier.

And the results were impactful. In 1990, then-South African President F.W. de Klerk released Nelson Mandela from prison, and together, they developed a new constitution for South Africa. Both men were honored with the Nobel Peace Prize in 1993. 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 (U.N. PRI) was released with 63 signatories and $6.5 trillion in assets. By 2021, the U.N. PRI had 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, then-British Prime Minister David Cameron gave a well-received speech on impact investing.

What’s the Difference Between SRI and ESG?

Environmental, Social and Governance (ESG) is an approach to investing with a focus on companies with positive outcomes on the environment, workers, and wider community. It is closely related to socially responsible investing, and the terms are sometimes used interchangeably. The main difference is that SRI practices involve specifically choosing or disqualifying investments based on specific criteria.

What’s the Difference Between SRI and DEI?

Diversity, equity, and inclusion (DEI) is a set of employment practices that seeks to improve the representation of disadvantaged and minority perspectives within a company. It is closely related to impact investing, and many impact investors consider a company’s DEI practices when deciding to invest. The main difference is that DEI practices are largely focused on improving representation within an organization, while SRI also considers the impact on the environment and wider community.

Is Socially Responsible Investing Profitable?

Socially responsible investing practices can’t always match the returns of oil and defense companies, but they can still show strong profits. Some studies have found that sustainable funds can outperform their non-SRI benchmarks, with 59% of studies showing that SRI investments perform as well or better than their conventional equivalents.

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 (SRI) 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 anytime without notice.