Impact investment is capturing the growing attention of mainstream investors, and everyone is increasingly hearing and talking about it.
During the past 12 months, I have listened to people talk about impact investing more than in all the previous years combined.
There is a growing awareness and an emerging community in the UK and Europe, following on from the great work carried out in the United States so far. However, it is still visible that most times you talk to people about Impact Investing, they tend to look back asking: “Impact Investing? What is that?”
This situation is something that will start repeating itself as society discusses the future of investing, as the world evolves in order to become truly sustainable, regardless of being in the financial services business or any other business.
In the next paragraphs, you will find a few key points, definitions and examples that can help to start understanding the concept and its applicable importance in our everyday conversations, decisions and actions. The main objective is to gain an initial view, learn about some of the people and companies leading the industry, and to share it with anyone that can benefit from it.
Impact Investing Is A Growing Focus For Investors
Impact investing is growing with some significant investors getting involved and setting up their own impact investment funds, and yet the sector is still at its infancy.
This is a segment of investment that has been growing rapidly, and the Global Impact Investors Network (GIIN) estimates from the latest annual survey that there is now $228 billion in impact investing assets which is roughly double that of last year.
Thomson Reuters Foundation reported that members of Toniic, a global investment club for impact investors, have seen similarly spectacular growth with members having their combined $2.8 billion of impact investments, which are up from $1.65 billion in 2016.
So What Is Impact Investing? “An Emerging Asset Class”
Impact investment, as defined by GIIN, are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
The term itself dates back to 2008 when the Rockefeller Foundation first coined the term impact investing when there was an emerging conversation on how to use capital differently.
JP Morgan reported that impact investments, an emerging asset class, “offers the potential over the next 10 years for invested capital of $400 billion–$1 trillion and profit of $183– $667 billion”
Alongside impact investing other similar ideas have evolved such as conscious capitalism, sustainable investment, and ethical investment.
Socially responsible investment (SRI), which is a well-defined framework for choosing investments based on environmental, social and governance (ESG) criteria is not new to investors. One might argue that impact investing has evolved out of SRI to the broader investment community. The difference today is that impact investors are far more proactive in their intention for positive impact as opposed to merely avoiding the negative impacts.
As someone who is reading this, it may not surprise you that the world’s biggest global problem is now attracting impact investments. So what constitutes impact?
There is a wide variety of problem that needs addressing these include the social issues such as humanitarian crisis of refugees, alleviating the impact from climate change-induced extreme weather events, reducing air pollution in cities, addressing ocean plastics, transforming our energy system to clean energy or sustainable ways of food production, to providing access to quality education and healthcare.
More recently, in 2016, the United Nations launched the Sustainable Development Goals (SDGs) also known as “Global Goals”. These have helped focus on what needs to be achieved and measured in order to solve the world challenges.
This is now galvanising the global effort in addressing the biggest challenges faced by humanity. For many Impact investors and funds, the 17 Global Goals have become a guideline for key performance indicators.
Impact Investing, Traditional Investing And Philanthropy
You might wonder how impact investment might be different from traditional investing or philanthropy. As this Forbes explainer video shows, impact investment “combines both the rigorous analytics of traditional investment and the heart of philanthropy.”
Given the serious challenges, and in some cases irreversible damage, that the world is facing, there is a long-term and fundamental shift in society with businesses now expected to do good and be purpose driven. This shift means that it is no longer acceptable or viable for companies to only prioritise profit maximisation for shareholders, and most key players in the market and the world are finally awakening and taking action.
Al Gore’s documentary, An Inconvenient Truth, highlighted the environmental challenges we were facing more than 10 years ago. He didn’t stop there and went on to found Generation Investment Management in 2004 together with the head of Asset Management at Goldman Sachs, David Blood, “To deliver superior investment performance by consistently taking a long-term view and fully integrating sustainability research within a rigorous framework of traditional financial analysis.
Today they manage $18.5 billion mainly focused on equities.
One of the challenges that well-intended funds like this one had been facing in the past was the lack of flow with size and scalability potential, but this is already changing.
Blackrock Becomes An Impact Leader
Fast forward to today, Blackrock, the world’s largest investment firm managing over $6 trillion of assets is telling companies to consider their societal responsibilities. Blackrock CEO Larry Fink made it clear in his annual letter that a corporation needs to “serve a social purpose.”
“…society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
UBS Gets On Board
UBS have been active in impact investment with the launch of their first impact fund of funds that raised $51 million in 2015. They went on to raise a record $471 million in 2016 for an impact fund that invests in cancer research initiatives and converts them into commercially successful businesses.
The bank has committed to investing at least $5 billion of private client assets to Sustainable Development Goal-related impact investing, in a strategy that includes partnering with the Rise Fund – a new $2 billion social impact fund.
UBS thinks that collaboration with financial services firms is essential if the funding of the SDGs is to become a more mainstream strategy for private capital investors.
Their white paper for the World Economic Forum annual meeting 2017 unveils a blueprint for channelling private wealth towards this.
The follow-up report in 2018 shares 5 lessons to help bridge the $5-7 trillion funding gap to achieve the 17 Global Goals:
1. Portfolios should consider including Multilateral Development Bank bonds.
2.There is no common convention on what “sustainable investing” means.
3.Financial firms must work together to close the SDG-funding gap.
4. Philanthropy is moving away from simply giving money to more measurable approaches.
5.Firms and social entrepreneurs should work together.
6. For their efforts, actions and commitment, they have been named sustainability leaders in the Dow Jones Sustainability Index.
If you are interested to learn how you can approach sustainable investing, according to James Gifford, UBS head of Impact Investing, there are three main strategies:
2. ESG Integration
3. Impact Investing
Impact Investments Yields Competitive Returns
There is a common misconception that a business that aims for the double bottom line of impact and financial returns have lower returns. However, academic research has long proven that what is good for the people and the environment is also good for business performance.
For example, a 2015 study by Friede, Busch, and Bassen (ESG and Financial Performance: Aggregated Evidence from more than 2,000 Empirical Studies, Journal of Sustainable Finance & Investment) found a non-negative relationship between investing along environmental, social, and governance (ESG) factors and corporate financial performance in around 90% of the more than 2,000 empirical studies conducted between 1970 and 2014.
There is also now empirical practical evidence built over the last 10 years that shows impact investment funds returning double digits and above comparable portfolios. More of this to be covered in future articles.
Impact investing is here to stay and to grow exponentially over the next decade and beyond. It is simple, our future depends on it and people are understanding this at last.
The philanthropic way of giving to charities is no longer the only way to make a difference and impact investing is now seen as a key driver for positive change.
Impact investing has gained traction among a wide range of investors, including the largest financial institutions, pension funds, family offices, private wealth managers, foundations, individuals, commercial banks, and development finance institutions.
There is much more that needs to be done to bridge the funding gap to achieve the SGDs by 2030 and help the world from irreversible consequences.
The potential of making returns from impact investing is comparable to traditional investments, and although are slightly lower depending on the benchmark, purpose-driven people and investors are aware of the importance of the change on expectations over the greater benefit for society.
Next Steps: What Can You Do About It? How Can You Get More Involved?
The first step is always to change behaviours. But where do we start?
Initially, it could be as simple as learning about the SDGs and which one you care the most about.
Conscious consumption is the next step completely under your control and remit of direct actions.
Collaboration is crucial and every stakeholder in society can contribute, including the people, investors, financial institutions, government, policymakers and regulators.
Every person can start making investments aligned with their values using their financial advisors working with specialised impact focused funds.
If you are an institutional investor, gaining awareness about what is happening and sharing with colleagues and the wider organisation you work with is the next thing you can do. Creating an Impact Investing team or asking for advice is another option. You can make all the difference at scale.
As a High Net Worth Individual, there are various options, but one I always recommend is to look at other people that are doing what you would like to do to learn from them. You can listen to one such example in the podcast Impact Leaders, Martin Leuw. He is the CEO and founder of Growth4Good is an impact investor. I spoke with him for the inaugural episode of the podcast Impact Leaders, in order to share his story, messages and advise, to increase awareness about impact leadership, investment and performance with purpose.
The key is to take action! Starting today.
By: JP Dallman