What is impact investing?
Let us begin this article by understanding the definition of impact investing! According to Investopedia, impact investing is an investment strategy that not only aims to generate financial returns but also seeks to create environmental and social benefits.
The underlying concept involves investing money and capital in the hopes of obtaining positive social outcomes. It is a strategy that has been welcomed by both individuals and institutional investors such as hedge funds, private foundations, banks, pension funds and other fund managers. It can take on the shape of numerous asset classes and offers a multitude of positive outcomes.
There are a variety of impact investment types and a range of opportunities open to investors. Investors can choose to either invest in emerging markets (EM) or developed economies. Impact investment opportunities span over various industries and are composed of innumerable activities including:
2. Energy – particularly renewable & clean energy
6. Affordable housing
An example illustrating impact investment is the Ghana Venture Capital Trust, which was established by the government of Ghana in 2004 aiming to provide financial and technical assistance to small and medium-sized Enterprises (SME’s).
The VCTF received $150,000 from the Rockefeller Foundation in 2012 to develop the concept and test the market. This was a huge success as it led to the development of the Ghana Institute for Responsible Investments and further actions to grow the market.
How and why is the trend growing?
Impact investing is increasingly gaining traction in the global market today as it aligns Corporate Social Responsibility (CSR) and investor goals. Impact investors are referred to as personal value investors as they want their investment to reflect the values and ethics they hold.
The strategy is increasingly being employed by individual and institutional investors as it can help to address the growing environmental and social challenges.
According to the Global Impact Investing Network’s report, impact investments doubled in size from 2017 to 2019. The same report indicates that investor interests will continue to grow in size.
Perhaps the most comprehensive report on impact investment trends and sustainability projects is composed by the US SIF (CoPeace, 2020). The report on Sustainable, Responsible and Impact Investing Trends, stated that impact investments have increased by 38 percent since 2016. The report further goes on to provide insights into the sustainable and impact investing trends in the United States.
The first report, published 25 years ago, presented a grand total of $639 billion in impact investing projects. Today the sustainable and responsible investing industry has grown 18-fold, matured and has captured numerous asset classes.
What are the goals of impact investors?
Given the state of rapid environmental degradation and climate change in the world today, innumerable organizations are working towards achieving the Social Development Goals (SDG’s). Saldinger (2019) states that the UNDP and other organizations are seriously considering the role of impact investment as it provides a viable solution to bridge the financial gap required to achieve the SDG’s.
Furthermore, analyzing the situation from a purely financial standpoint aids in our understanding as to the goals of impact investors. Corporate management, CEO’s and Directors are increasingly realizing how ESG’s are strongly related to a more enhanced financial performance.
As there is increasing consumer demand for companies to have better performance and meet ESG criteria. The crux of the situation is that meeting the ESG criterion is indicative of a well-managed company, which has a better financial performance. Therefore, interestingly enough “doing good” also means doing good business.
What are some of the challenges of impact investment?
Undoubtedly impact investment has gained tremendous amounts of traction, yet there are some challenges that it faces. Despite its strong growth, financial advisors are slow to recognize its potential, only 43 percent of financial advisors indicate that impact investing is part of their financial planning process.
Moreover, one of the greatest challenges faced by US asset managers with regards to sustainable investing is the financial trade-off. Many investors are deeply concerned that “doing good” might be too costly and have a negative impact on their financial performance. This stems from their fear of losing their competitive edge, and two-thirds of investors state that sustainable investing could lead to lower competitive returns.
However, the situation is not as bleak as it sounds and there is some positive news as well! A closer look at the available data suggests that companies who have invested sustainably have performed financially as well as traditional investments.
Impact investing gives equal importance to profit, the environment and society. It has gained a lot of traction and is being adopted by governments, companies and even individuals all around the world.
It is not only redefining the traditional investment world, but it is forcing capitalism to evolve – from a profit-maximizing motive to New Capitalism, that stresses social, environmental and financial factors equally.