Impact investing’ has long been a term in the investment vocabulary. Until recently, however, impact investment was on the periphery: a feel-good activity for ethically minded investors, but not a mainstream concern. But this is changing. So, what is impact investing and what is its future?
Impact investing is on the rise. Many will argue this is because of a shift towards the new concept of the ‘Triple Bottom Line’, where businesses are considering people and planet, as well as profits.
But what exactly is impact investing? Which demographics dominate the sector? And how might impact investing evolve in the future?
What is impact investment?
Impact investing is the act of choosing investments with the intention of creating positive social or environmental change as well as a financial return. Investments may be made in developed or emerging markets and across a range of sectors.
The aim of impact investment is to provide capital to solve the world’s most pressing challenges whilst simultaneously building investor wealth – a win-win proposition.
Morgan Simon, impact investing expert and author of ‘Real Impact: The New Economics of Social Change’, traces the origins of impact investment back to Quakers in the 1800s.
“Quaker religious organisations sought to avoid profiting from slavery, going as far as rejecting sugar from the south and using maple from the north instead,” Morgan explains. “It gained popularity through the South African anti-apartheid movement, and then expanded over time to be more holistically about proactively investing in companies doing good in the world rather than the whack-a-mole of avoiding the bad.”
The term ‘impact investment’ was coined in 2007. Impact investment organisations have since proliferated, with the Global Impact Investing Network (GIIN) estimating that more than half of active impact investing organisations made their first transactions in the last ten years.
GIIN’s April 2019 report, ‘Sizing the Impact Investing Market’, states that there are now more than 1,340 organisations managing $502bn (£402bn) in impact investments globally. 58% of those organisations are based in the US and Canada, while a further 21% are based in Western, Northern and Southern Europe.
The positive nature of impact investments is key, but so is the financial return. Barclays’ July 2018 report on ‘Investor Motivations for Impact’ states that 82% of investors expect near or above market returns from an impact investment.
Why choose impact investments?
The impact investing movement has made significant gains over the last few years. According to Barclays’ report, 15% of investors reported having made an impact investment in 2017, compared to 9% in 2015. With initiatives like the UK government’s Impact Investing Institute, impact investment is set to exponentially increase.
Morgan Simon attributes the sudden influx of impact investors on two major factors.
She comments: “The first is the numerous studies that have shown impact investing outperforms on the market, as sustainable companies build sustainable value.
“The second is how both people and institutions are thinking more holistically about the legacy they want to build. No one wants to tell their grandchildren they built wealth for their family by locking up someone else’s in private prisons, or destroyed the environment so thoroughly that there’s no world left to enjoy. People are thinking more about a holistic return definition that is not just about making 8% vs 7%, but about societal impact.”
Investors can choose impact investments according to the causes most near and dear to them. Specialist funds cater to issues like racial justice, environmental protection, and other areas.
FinTech company PensionBee introduced their Future World Plan following clear interest from consumers in sustainably invested pensions. Currently 12% of PensionBee’s users are invested in the Future World Plan.
The traditional notion of impact investment is to avoid unethical or unsustainable investments and cherry pick the good. PensionBee have taken a slightly different approach, using shareholder sway to create positive impact in unsustainable industries.
Romi Savova, CEO of PensionBee, explains: “There is a current movement to divest of shares in companies that are harming the environment. What the movement fails to recognise is that capital markets are large and the divestment by one party is usually replaced by the investment of another.
“A much better strategy is buying as many shares as possible in the companies we want to change and then using shareholder rights to get them to behave differently. For example, the Future World Plan and the asset manager behind it, Legal & General, have been instrumental in getting companies like Shell and BP to commit to carbon reduction targets.”
Impact investors can put their capital towards both wealth creation and societal influence.
Which demographics are taking the lead?
Perhaps unsurprisingly, millennials are the most active demographic in the impact investment sector. Barclays’ ‘Investor Motivations for Impact’ report states that in 2017, “43% of respondents under 40 had made an impact investment, compared to 9% of those aged 50-59, and only 3% for those aged over 60.”
On one hand, this predilection among younger generations for impact investment seems to bode well for the sector’s long-term popularity. On the other hand, the majority of the world’s wealth – and therefore potential impact capital – is held by older generations.
The Barclays report states: “Developing products and services built around the wants and needs of millennials will be crucial to attract and retain ‘next generation wealth’. But we mustn’t overlook older investors – after all, these are the investors with the highest investable assets and the wealth to drive the impact sector forward today.”
Over a decade on from the Great Recession, total global wealth has recovered and then some. The Financial Times’ 2018 report, ‘Investing for Global Impact’, states that as of 2017, there were a record 2,257 billionaires in the world – a 55% increase on the previous five years. Impact investments can make huge changes if they attract the richest investors.
The future of impact investment
More capital may be needed for impact investing to truly boom, but the GIIN is optimistic. In ‘Sizing the Impact Investing Market’, the organisation states: “One in four dollars of professionally managed assets (amounting to $13tn) now consider sustainability principles. There is great potential for these investors, who have already aligned their capital with their values, to more intentionally use their investments to fuel progress through impact investments.”
The UK National Advisory Board on Impact Investing (UK NAB) agrees. In its report, ‘The Rise of Impact’, UK NAB states: “A rapidly growing number of mainstream investors are entering the field, such as Barclays, Bain Capital, TPG, Goldman Sachs, UBS, AXA and Blackrock. We believe impact will ultimately become a standard element of business and investment decisions, alongside risk and return.”
The UK has been a major player in the rise of impact investing, but with its ascension to the mainstream, UK NAB warns that the UK will have to work harder to keep its edge. It says: “While the UK has historically led the world in this field, we are now seeing an explosion of interest around the world – and others are catching up fast.”
And what about those on the ground? Romi Savova, CEO of PensionBee, predicts sustained growth for impact investing.
“Over the longer term, PensionBee expects impact investment to become less of a ‘trend’ and just part of ‘the way companies do business’,” Romi says. “There is overwhelming evidence that action on environmental sustainability, gender diversity and effective governance leads to better economic outcomes.
“Investors don’t need to sacrifice returns to achieve social impact – in fact, responsible investing could enhance returns. It’s just the way things should be done.”