Investing with an Impact
The area of impact investing has been growing over the years. The idea of using financial investment as a tool to create a better society is becoming more and more appealing to investors. However, there are still many questions about this field, such as whether or not it is possible to have a positive social impact whilst also creating financial return.
At the end of 2015, 193 member states of the United Nations adopted a collection of 17 goals known as the Sustainable Development Goals. These goals were formed with the aim of being “a blueprint to achieve a better and more sustainable future for all”, and are intended to be reached by the year 2030. In order to meet these goals, there are calls for not only governments, but also the private sector to contribute towards creating a better, more sustainable society in the future. One of the ways in which the finance industry is tackling this issue is through making impact investments.
The field of impact investing has grown out of being a niche area, and is proving itself to be more than just a trend. In fact, in 2019, the Global Impact Investing Network (GIIN) estimated that over 1300 impact investors worldwide manage USD 502 billion. Most of this is done by companies with headquarters in North America and Europe, with the vast majority of the firms in this area being asset managers such as UBS Wealth Management and Goldman Sachs Asset Management.
You may now be wondering what exactly the difference between impact investing and traditional investing is. The term impact investing has been defined by the GIIN as being “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” These types of investments are different from traditional investments due to the fact that the environmental and social returns are valued as highly as the financial returns. They focus on areas such as microfinance, sustainable agriculture, renewable energy and healthcare amongst many others. However, this does not mean that these investments result in weak returns. In fact, a study done by Friede, Busch and Bassen in 2015 found a non negative relationship between investing using environmental, social and governance criteria and the corporate financial performance. In another study done my Mckinsey called ‘A closer look at impact investing’, and in particular ‘The myth of lower returns’(Pandit, V. and Tamhane, T., 2018) they studied the returns of 48 different impact investments, and found an average internal rate of return (IRR) of 10% and also found that one third of the investments had an average IRR of 34%. This provides some evidence suggesting that choosing to invest impactfully doesn’t necessarily mean having to make a trade off away from receiving financial gains.
Although the possible gains are clear, the question which remains is how impactful are these impact investments? This question has led to much work being done, with new metrics such as the social return on investment (SROI) and the impact multiple of money (IMM). These metrics help to fill in the information gap which may convert more investors into becoming believers in the benefits of impact investing. This will be important going into the future, as more millennials show interest into this growing asset class.This will lead to a greater demand in the area of sustainable investments, with a demonstrated track record of both financial returns and creating a positive change, going forward.
Many large firms are lining up to put large amounts of money into the area of impact investing. Blackrock opened the Blackrock Global Impact Fund in order to provide investors with the opportunity to make long term financial returns, whilst also addressing the global issues listed in the UN Sustainable Development Goals. A few examples of issues which the fund aims to tackle green energy, affordable housing and public health. Triodos bank in the Netherlands is also another large player in the area of impact investing. Triodos Investment Management manages EUR 4.9 Billion, and focuses on energy and climate, financial inclusion, sustainable food and agriculture and impact equities and bonds. By the end of 2019, some of the fund was able to reach 19.1 million borrowers in emerging and developing countries, resulted in the serving of 23.8 million organic meals and led to 400,000 tonnes of carbon emissions being avoided.
Overall, the area of impact investing is one which has a bright future. With a growing demand from investors to see funds increase their role in creating a better global society, we are seeing more and more funds scaling up their investments in this area. The financial sector’s participation in this area is essential for meeting the UN sustainable Development Goals, as well as for safeguarding an overall better future. As the area of impact investing grows, this creates more hope for the future of our society.
