Leading investment bank JP Morgan has forecast that the impact investment market will be worth in the region of US$1trn in two and a half years. Research by ethical bank Triodos shows the socially responsible investing (SRI) market now accounts for £16bn in assets under management in the UK market.
According to research by the EIRIS foundation, in 2007, investment in UK green and ethical retail funds was about £8.9bn and by October 2017 this figure had nearly doubled to just over £16bn, the same as Triodos’ estimate.
There’s little doubt that it’s a growing market, and there are four high level reasons lying behind this growth.
1. People want to make an impact
It really is as simple as that: people are investing for impact because they want to make an impact. They want to make a genuine difference to the world around them.
Impact investments are those which fund businesses whose activities have a positive impact - social or otherwise - on the world around them. They may be pursuing some specific environmental good, such as reducing pollution or energy consumption, or they may be benefiting society in a more general way by providing jobs and training, while at the same time producing goods and services for which there is a genuine social need.
Investors are finding this increasingly attractive. Research shows we like to feel that our money is not only making a decent return but that – at the same time – it’s also making a difference. A recent survey of 1,800 individuals in the UK revealed that 56% had at least a moderate interest in impact investing.
This is particularly the case with younger investors. Not only do they tend to be more idealistic but the internet age has made them aware of and informed about a range of global problems and what needs to be done to address them. The internet allows them to research which businesses are genuinely doing something to tackle those problems and, through new digital platforms, makes it fairly straightforward to invest in them.
2. Impact-driven businesses are attractive
Investors are also attracted to companies that make an impact because these are businesses that tend to make a compelling business case.
There are a number of possible reasons for this:
- These firms are in it for the long term and so plan to build businesses which are stable and sustainable
- If they are making an impact, then, by definition, they’re addressing a proven market need and usually one which isn’t adequately being met by other providers
- They exist to improve lives and increase social good and this leads to satisfied customers
- As a result of the above, satisfied customers mean a strong and positive brand image, with investors, employees and customers being enthusiastic brand ambassadors
- They can attract talented individuals who don’t want to work for employers who only care about the bottom line
Richard Eagling, head of Pensions and Investments at moneyfacts.co.uk said:
"Sustainable practices and good governance can give companies a competitive advantage."
The evidence suggests that all this feeds through into the bottom line and to the ultimate return on investment, which leads perfectly onto the third point.
3. Impact investments give a good return
It might have been thought that investing for impact – while worthy – damages net worth. That is to say that while it’s good for the conscience it’s not so good for the pocket. Surely, management of businesses that focus on doing good, on making an impact and social benefit, take their eye off the ball in terms of making a good return for their investors.
But, as we saw in point three above, far from being handicapped when it comes to making a profit, businesses which aim to make an impact are often better placed to perform well in purely financial terms.
This seems to be supported by the figures. There are a number of studies and examples we’ve quoted regularly. For example, Swiss Re chief investment officer Guido Fuerer told Reuters:
"Equities and fixed income products from companies and sectors with a high ESG [social and governance] ratings have better risk-return ratios."
And there’s a new study from Moneyfacts which looks at the performance of ethical funds compared to their mainstream peers over four different time frames and in five different categories or sets of fund. It found that ethical funds have outperformed their mainstream peers in 13 of the 20 scenarios surveyed. Over the past year, ethical funds have performed better than their traditional counterparts, posting an average growth of 16.8% compared with 15.2% from the average non-ethical fund.
The average ethical fund (30.4%) has also eclipsed the average non-ethical fund (29.1%) over three years, but it is over five years that ethical funds have really performed well, with the average ethical fund returning 76.1%, compared to an average non-ethical fund return of 64.1%.
”With every passing year, the traditional view that investing ethically entails sacrificing profits looks increasingly outdated,” said Richard Eagling, head of Pensions and Investments at moneyfacts.co.uk. “In our latest survey, ethical funds have more than held their own.”
4. A taxing question
For UK investors there’s another compelling reason to choose impact investments and that’s the generosity of the taxman.
The Treasury is generous for a reason. The government is understandably keen to encourage and nurture those businesses with innovative, disruptive technologies and know-how and these are often those businesses which have the greatest positive social impact.
It does this primarily through the EIS, or the Enterprise Investment Scheme. This was introduced to provide significant tax incentives for those investing in smaller, higher risk, unlisted companies..
The most notable of the tax reliefs relates to income tax and allows investors to claim back 30% of the value of their investment to set off against their income tax liability.
There’s also a ‘carry back’ facility which allows all or part of the cost of shares bought in one tax year to be treated as though they had been acquired in the year before, therefore allowing the above tax relief to be used in a previous year.
A further benefit is that you don’t have to pay capital gains tax (CGT) on profits from investing in EIS-eligible companies. This is offered in addition to your annual tax-free capital gains allowance across all investments, and you’re also entitled to defer CGT by investing in an EIS-eligible company, irrespective of the source of your capital gain.
And with loss relief available, should your investment in an EIS-eligible company be sold for less than you paid for it, the reality is the amount of capital you have at risk can be greatly reduced when investing into EIS opportunities.
Investing for impact
The entire process of impact investing has become considerably more popular in recent times. As a result, such opportunities have become more accessible and this in turn has further assisted in increasing the popularity of impact investments.
Impact investing isn’t something that’s restricted to a few today. With the opportunities vast and varied, becoming an impact investor is a real possibility for most.