What is Impact Investing, and Is it a Good Investment Strategy?
In a world with quickly evolving priorities and a society becoming more socially aware and conscious about its impact on the planet, impact investing is becoming more popular as an investment strategy that considers each investment’s social and environmental impact.
What is impact investing?
As described by the Global Impact Investing Network, impact investing comprises of “investments made to generate positive, measurable social and environmental impact alongside a financial return”.
These investments can be made in renewable energy, microfinance and other financial inclusion-based firms, conservation, healthcare, education or sustainable agriculture.
Impact investing differs from philanthropy – the practice of donating capital to causes and companies – as investors expect some return from their investment, whether that’s the preservation of their capital or its growth.
A principal type of impact investing is Socially Responsible Investing (SRI). The investor selects investments based on specific ethical specifications, motivated by personal values, religious reasons or politics.
Another route – though it’s hotly debated as to whether this investment strategy can be classed as impact investing – is Environmental, Social and Governance (ESG) investing.
This strategy assesses social and environmental practices of investments in relation to how they might impact the financial returns of the investment. For example, a company using child labour will deter the socially conscious buyer and reduce the value of the investment.
With ESG, the primary concern is financial returns, while other impact investing strategies focus on the social and/or environmental benefits first, with financial gain as a secondary priority.
Is impact investing a financially viable method of investment?
One of the most common misconceptions of impact investing is that it doesn’t generate healthy investment returns.
Yet, in a survey conducted by the Global Impact Investing Network in 2020, it was found that returns met or exceeded investors’ expectations in terms of both the social/environmental impact and the financial reward they garnered.
67% of the participants in this survey reported receiving market-rate returns from their investments. In comparison, 18% received below-market-rate returns (yet close to the market rate), and 15% reported below-market-rate returns (closer to capital preservation).
It must also be noted that the motives of impact investors vary, with some aiming for lower returns in favour of achieving particular social or environmental goals.
While impact investing may not always yield as high returns as investing strategies that don’t consider the social impact, the difference between returns is slight. There is an average 6.4% return on impact funds compared to a 7.4% from non-impact funds – yet the difference between the impacts these make on the world is vast.
Who uses impact investment strategies?
All sorts of organizations might choose to use an impact investment strategy, including fund/wealth managers, financial institutions and banks, NGOs, pensions funds, individuals and private foundations.
One of the most well-known and esteemed foundations associated with impact investing is the Bill and Melinda Gates Foundation, with a fund of $2.5 billion directed towards investing in ventures aligned with the foundation’s values – namely, improving health and education contributing to gender equality globally.
Traditionally, foundations, banks, fund managers, and other institutional investors have carried out impact investing. Though – more and more – individual investors choose to evaluate their investment choices based on the environmental and social impact their investments are likely to carry.
Impact investing appeals most prominently to the younger generations – primarily millennials – who are, overall, more interested in aiding social and environmental causes.
As the younger generations will eventually represent the most significant market influencers, it will be in the best interest of investment platforms to offer impact investing as an investment route. As such, many investment houses – including banks, asset management companies and even online investing platforms – have already begun to offer funds to allow socially conscious investors to make ethical investments through impact investing easily.
So, if you want to grow your money while contributing to the social or environmental causes that are important to you, consider impact investing to reap the financial rewards of investing while making a positive difference to the world.