We look at how impact investing can make a difference.
How you can have an impact with your investment
What is Impact Investing?
Impact investments are thought to be those whereby capital is allocated in order to create a positive, measurable, social and environmental impact as well as generating a financial return. Often used interchangeably (and perhaps incorrectly) with ESG investing; impact investing concentrates on the positive externalities produced by a company’s products or services. Both investment practices will seek to identify companies with sound ESG practices in its operations, but for a company to qualify as an impact company it has to be doing something material in helping the world achieve its sustainability goals.
When did impact investing start?
Although investors are becoming increasingly aware of both impact investing as a concept, as well as the benefits derived from it - the idea of “doing well by doing good” is not new. Socially Responsible Investing (SRI) has been around for a number of decades and in that time has broadened significantly to encompass global change, and generate competitive returns. Rather than screen out investments which conflict with moral, social or ethical values, SRI now pursues making investments in companies making a positive impact. Fast forward to 2007, and the term “impact investing” was coined by The Rockefeller Foundation following emerging conversations on how to allocate capital differently.
Why is impact investing important?
The concept contends the long-held views that environmental and social issues are only to be addressed through philanthropic donations, whilst investing should focus exclusively on achieving financial returns. Now, investors have viable opportunities to advance social and environmental solutions through investments which also produce competitive financial returns. In 2015, the General Assembly of the United Nations introduced 17 Sustainable Development Goals (SDGs) for which we as a specie need to meet in order to improve the lives of hundreds of millions of people around the world. Currently, we are not keeping pace. More money is needed to implement the SDGs, especially from the private sector and financial institutions – who have the ability to reduce perceived risks and encourage other stakeholders to invest.
How effective is impact investing?
The Global Impact Investing Network (GIIN) estimated the impact investing market size at the end of 2018 is over $500 billion in terms of assets under management. Spread over 1,340 organisations this indicates that a significant amount of capital is at work to address the issues we face. You also only have to look at the surging demand and issuance of green bonds to see that investors are increasingly seeking to allocate some fixed income assets sustainably. These help to finance projects aimed at energy efficiency and pollution prevention to name a few. One measure illustrating this is the ICE Bank of America Green Bond Index, which has grown from $55bn in 2015 to $345bn at the end of October 2019.
How impact investors actually measure impact?
This is a key challenge for investors and forms part of an ongoing discussion into whether there is the capacity to measure the intangible impacts of investments. Various new instruments for impact investing are being developed in this dynamic and generative new field. Increasingly, impact measurement is becoming data driven – however it still relies on qualitative information to produce reliable results - which makes disclosure, transparency and accountability all the more important. We are already seeing evidence of industry-wide systems, policy influence and sector interventions – all aiding in familiarising the impact investing narrative with investors.
To that point, the following funds invest in order to generate a positive impact with some giving investors the ability to see what effect their investment can have:
- Aims at delivering a higher total return than its respective benchmark over any five-year period by investing in companies having a positive societal impact through addressing global sustainability challenges. Although the fund has been running just over a year, it has lived up to its name by strongly outperforming the IA Global sector. The fund embraces the SDGs framework and allocates capital to companies focused on six key impact areas which are aligned with the SDGs. With a wealth of expertise at the helm, and reasonable growth in assets and share price shown so far it will be an interesting one to watch in the coming years.
- The fund looks to invest in high quality companies, whose products or services are aimed at generating positive societal and environmental impacts, with an emphasis on strong ESG practices. Incepted in April 2018, and run by co-managers Charles Montanaro and Mark Rogers, the fund has fared well – outperforming the sector in that time. From their 2019 Impact Report, they indicate that a £1 million investment can help to treat 200,000 gallons of water and provide 3,000 people access to healthier foods. Whilst this may be a very large investment, scale this down and you can start to see the impact your money can have.
- The single global equity strategy of a specialist fund management business focused entirely on environmental and sustainable investing, seeks to invest in companies providing solutions to sustainability challenges. Their team is one of the most experienced in the sector and mould the investment universe around the identification of four mega-trends in: resource scarcity, ageing population, rising population/living standards and globalisation. Having been around a bit longer than the other funds, WHEB has a track record of producing reasonable market rate returns. In addition to this, their microsite has a plethora of information allowing investors to see the positive effects their investment will have. In 2018, they reported the strategy, through its investments, to have avoided 218,000 tons of CO2 and recovering or recycling 49,000 tons of waste.
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