Impact Investing

What is impact investing and why is it growing?

Impact investing is gaining ground rapidly as an investment strategy and a way to address social and environmental issues.

Growth in Environmental, Social and Governance (ESG) investing has been accelerating thanks to the ‘Greta Thunberg’ effect and increasing numbers of investors aligning savings with their values.

ESG investing can use several approaches such as Inclusion, Exclusion, and Integration. Impact investing is a fourth approach that aims to invest in firms that have a specific positive effect on social or environmental issues, while also providing a financial return to investors.

It usually involves goal-driven investments, for example in social housing projects to alleviate homelessness, or windfarms to promote clean energy.

Impact investing benefits

Impact investing has a common-sense appeal. It means investing in companies that are motivated and often set up specifically to make a positive difference. In contrast, other ESG styles might involve more complicated tasks, such as using shareholder action to change a company whose profits have primarily come from negative social or environmental practices.

Impact investing arguably has the clearest definition, as laid out by the Global Impact Investing Network (GIIN). The GIIN definition is:

‘Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals .’

In contrast, some see other ESG investment styles as too vague, subjective or negative in approach. Many also see impact investing as a good alternative or complement to charitable giving as it incentivises the investee company to run more efficiently.

Impact investing challenges

Impact investing is the most concentrated and constrained style compared to Inclusion, Exclusion, and Integration based approaches. That means it has the least flexibility and diversification, although this can also give it more focus and conviction.

There has been a lack of standardised measurement information available. Many managers and research firms still use their own tools, methods and terms. However, the increasing popularity of the United Nations Sustainable Development Goals (SDGs) as a framework for impact targets is helping address this.

Because impact investing is still relatively new, it has been difficult for investors to see the effect of their funding. This is also being addressed as, according to GIIN research, 97% of impact investments have met or exceeded expectations on impact.

Some might suspect that impact investing underperforms non-impact. But as the market matures, most impact investments have outperformed non-impact funds consistently. 91% of impact investments have met or exceeded expectations for financial performance, according to GIIN.

Another challenge for advisers is that most impact investments are in relatively small and unlisted companies, so it is harder to allocate larger investments. This will change as unlisted opportunities list on the stock market; and more companies meet impact criteria. The market will also become more liquid.

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Growth of impact investing

In the latest Global Sustainable Investment Alliance Review (2018) impact investing represented under 2% of total sustainable assets, but it was gaining ground rapidly. According to GIIN, in 2018, assets in impact investing were around $502 billion, double previous estimates.
If good returns continue and the market becomes more accessible, this growth is set to keep snowballing.