The difference between philanthropy and investing for social benefit.
What is impact investing?
‘Impact Investing’ is the buzzword of the moment in the finance and investment industry.
After all, the Global Impact Investing Network (GIIN) has estimated that the size of the global market has reached US$502 billion.
With many seeking to get involved in impact investing it is important to clarify what exactly constitutes an impact investment, the trends of the industry and the pros and cons of involvement.
This is a condensed version of a longer article, What is Impact Investing?, featured on CNote’s website.
At its core, impact investing is about positioning capital with the intent to bring about some socially desirable outcome with the expectation of a financial return.
There are two key elements:
1.An investment with the intention to do good
2.An expectation of financial returns
Baked into this definition is some subjectivity.
Specifically, what may be a socially desirable outcome for one person may not be the same for another.
Nonetheless, generally, the social outcomes investors seek are unlikely to face much dispute even from the most critical investors.
Some of the causes impact investments often support include; lowering greenhouse gasses, eradicating poverty, increasing economic opportunity for underrepresented communities and feeding the hungry.
The expectation of financial returns is significant because it is what separates impact investing from philanthropy.
How popular is impact investing?
What many don’t realize is that impact investing has grown to become a serious force in the investment world which dictates the flow of billions of dollars in capital each year.
In 2018, according to GIIN’s 2019 Annual Impact Investor Survey of 266 companies, the total amount invested in impact funds was at least US$239 billion. This is up from 2017 and 2016 when the impact investing market totalled US$114 billion and US$15.2 billion, respectively.
Financial giants like Goldman Sachs and Zurich Insurance are now earmarking US$13.7 billion toward impact investing. BlackRock, the world’s biggest asset manager, has created a division solely devoted to impact investments.
There is also attention from international organizations like the UN which has gathered over US$62 trillion from more than 1,500 asset managers to fund the Principles for Responsible Investment.
While the chart above only reflects those surveyed by the GIIN, the chart below from the US SIF: The Forum for Sustainable and Responsible Investment, shows that over US$12 trillion in assets have been deployed across ESG, SRI and other impact-focused strategies as of 2018.
Established institutions aren’t the only ones interested in impact investing. Since 2008, Google search reports for “impact investing” have increased significantly.
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The trend does not show any likelihood of tapering.
In a recent survey of over 1,300 financial advisors and analysts, the CFA Institute found over 50 per cent considered ESG integration a major priority and were taking steps to include it in their analysis.
Moreover, the world is about to see a massive transfer of wealth from baby boomers to millennials.
By 2020, millennials will have an estimated cumulative wealth of US$24 trillion, and surveys show a whopping 76 per cent of them believe how they invest can have an impact on responsible investing.
Further studies show that millennials are 2x more likely than the average investor to invest in companies with social or environmental goals. Explore more statistics indicating the rising trend at Morgan Stanley.
Why Impact Investing?
Here are just a few reasons to impact invest. This list is not exhaustive, and what moves one investor may ring hollow for another.
- Align your investments and your values – because impact investing does good and generates financial returns, investors can support the causes they care about whilst putting their capital to work.
- Increase portfolio stability – A Morgan Stanley study, of over 10,000 equity mutual funds over 7 years, found that, on average, impact investing funds had lower volatility than comparable non-impact funds.
- Expand your network – The impact investing community includes policymakers entrepreneurs, human rights activists, and development experts, all dedicated to utilizing capital in pursuit of tackling important societal issues.
Critiques of Impact Investing
The world of impact investing is not without faults.
Like any booming industry, there are those who would co-opt the concept for profit.
Impact investing is having a golden moment of rapid growth and popular support and, according to Business Wire, is expected to grow to US$307 billion by 2020 (2x what it was in 2017).
As a result, some investment vehicles ostensibly use the “impact investing” label without actually committing to the underlying strategy, in an effort to attract investors.
Sometimes this is referred to as ‘greenwashing’.
In the impact investing industry, there are many who are concerned with increasing promotion and marketing of ‘impact strategies’ without sufficient evidence that they are following through with these claims.
Unfortunately, this means that impact investors must review investment documents and scrutinize impact measurement practices to assure that the product they are investing in accomplishes what it claims to do.
Another potential pitfall of impact investing is a lack of understanding or analytical rigour around quantifying the effect an investment has on a specific issue (like affordable housing).
For example, with microloans, lenders track the number of borrowers, repayment rate, and business growth.
However, knowing this information doesn’t necessarily capture the impact, or what that community would look like without its microloans.
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In some instances, a measurement may be too difficult given a myriad of variables, in other cases, it might be impossible to measure a given investment’s impact.
Another popular critique is that impact investing is skewed towards the wealthy and, by allowing for positive social impact and market-rate returns, it keeps the concentration of wealth with the well-off.
Conclusion
Whether you actively seek to align your dollars with your values, it’s clear that impact investment is rapidly growing and is changing the status quo of capital allocation.
Traditionally, funding and loans were only available to people with great credit or leverageable assets.
Impact investing changes this dynamic by looking beyond financials and seeing whether your investment will generate positive social returns, not just financial ones.
Ultimately, impact investing breaks down the perceived wall that exists between capitalism and social good. We can have our cake and eat it, too.
Let me know what you think about this piece and check out the original full length article.
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Image Credit: Paula Prekopova
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