Impact Investing

We’re all concerned about our impact on the world, but more importantly, we’re concerned about the impact companies are having on our world. With so much negative news out there, why not try an investment strategy that focuses on the positives and shines a light on the good that is being done.

What is Impact Investing?

In a nutshell, Impact Investing is the process of making investments that have a direct, positive impact on society and/or the environment. As with all investing, one of the aims is still to generate a financial return, however impact investing is also about creating a positive, measurable impact through investing.

The intention is to provide capital, directly through investments, to tackle some of the world’s most pressing issues, such as healthcare, renewable energy and sustainable agriculture. This can be in emerging or developed markets, but the impact needs to be measurable, so transparency is key.

How does Impact Investing work?

It has long been thought that market investments should be exclusively focused on financial returns, with social and environmental issues being relegated just to charity work. Part of this is due to the misunderstanding that these two are mutually exclusive. Over the years, more studies have shown that through monitoring and research, investors can find investments that contribute positively to society and to the environment whilst also gaining financial returns.

As Impact Investing is focused on investments that make direct, positive contributions to social and environmental issues, the main difference between that and SRI/ESG investing is the amount of monitoring involved. Measurements and metrics for impact investing will differ between investors as they each have different priorities and objectives. However a big part of this investment strategy is having a commitment to apply the same level of diligence to measuring social and environmental performance as is applied to financial performance.

Why is Impact Investing important?

The ultimate reason that Impact Investing is so important is that it is almost a necessity in order to meet global goals. The United Nations estimated that in order to meet their Sustainable Development Goals in developing countries, they would require approximately $2.5 trillion annually, so private capital is needed to make up this figure.

It is also possible to ‘do good while doing well’, which is sometimes a concern for investors. The Global Impact Investing Network have shown that the majority of the estimated $15 billion impact investment market has produced market rate returns.

GIIN

The Global Impact Investing Network (GIIN) is a group dedicated to supporting and promoting the effectiveness and scale of impact investing across the world. Its aim is to gather a global network of impact investors to help spread knowledge, awareness and research to each other, and to those that wish to get started with impact investing.

Another benefit of having a collective for impact investing is the ability to gather large numbers of investors and use this power to accelerate the industry’s development and to persuade companies to take action on the social and environmental performance.

Social Impact Bonds

In the UK, Social Impact Bonds are being used to fund initiatives and services to improve the social outcomes for a specific group of people. They are effectively pay-for-success vehicles in which investors fund services, which are then given objectives to meet. If these objectives are met, the commissioner would then make a payment to the investors.

According to gov.uk, the key drivers for Social Impact Bonds are to:

  • Innovate: enabling new solutions to be trialed and the risk of failure to be transferred to social investors
  • Improve: achieving better results from existing services
  • Align: correcting existing perverse incentives and focus on outcomes
  • Co-ordinate: bringing stakeholders together to solve complex issues
  • Unlock: creating future savings by shifting the focus on prevention and investing up-front

The first SIB was launched in the UK in 2010, and now there are hundreds across the world covering numerous different services. In the UK, we have seen SIBs launched to help with recidivism, homelessness and early intervention approaches with children and young people.

Rhino Impact Investment Project

A world first, the Rhino Impact Investment Project is planning to take the pay-for-results format of Social Impact Bonds and use it for species conservation. With a target launch date of Q1 2020, the project is aiming to increase the growth rate of black rhinos by over 65% within a 5-year term. As the first of its kind, all eyes will be on the project which, if successful, could pave the way for a wave of unique impact bonds.

Responsible Investing Themes