The world of impact investing is a vast and varied one. Although it has effectively been around in some form for many years now, it's only in more recent times that it's started to be talked about regularly right around the world.
Yet whilst it's without doubt rising in popularity, it's still a type of investing that many simply aren't aware of, understand or know enough about to begin considering a move forward.
And so if you're new to impact investing, there are five things you ideally need to know first and foremost.
1. What investing for impact actually is
On the highest of levels, investing for impact is making an investment in a project or enterprise which will have a significant, positive effect, usually either socially or environmentally. This could be the provision of clean water in developing countries, the generation of renewable energy, researching new drugs to fight disease, or in helping young people to gain access to education.
But impact investments can cover a wider range of activities and don’t have to be limited to those where the benefit is obvious and direct. They could also include businesses which have long term positive impacts. This might be a company which is building new homes, meeting a social need while also providing jobs, or it could be high tech company that has developed software to improve employee engagement and productivity.
2. How big the impact investing industry is
There are different estimates for the total size of the impact investment market. However, there seems to be come consistency in the figures being mentioned for the size of the UK’s sector.
According to research by the EIRIS foundation in 2007, investment in UK green and ethical retail funds totalled around £8.9bn - 10 years later in October 2017 this figure had nearly doubled to an estimated figure of just over £16bn. This data is supported by research by ethical bank Triodos, which also shows that the UK socially responsible investing (SRI) market now accounts for £16bn in assets under management.
Whatever the current figure, it seems to be on the rise globally. Last summer, for example, insurance giant Swiss Re announced it was moving its entire US$130bn investment portfolio to new, ethically-based benchmark indices. Also, leading investment bank JP Morgan has forecast that impact investments will be worth US$1trn in about two and a half years.
3. Why impact investing is so popular
There are four factors underlying the growing popularity of investing for impact:
a. People want to make an impact
There’s no mystery about it: people want their money to do some good. They like to know that their investment is not only making a decent return but that 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 even truer for the millennial generation. Younger people have always tended to be more idealistic, but now the internet and the explosion of media channels has made them aware of, and informed about, a range of global problems and what needs to be done to address them.
The internet also allows them to research which businesses are genuinely doing something to tackle those problems and, through new digital platforms, makes it reasonably hassle-free to invest in them.
b. Impact businesses make attractive investments
Companies that make an impact are also businesses that can make a compelling business case.
There are a number of possible reasons for this:
- These firms are in it for the long term and 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, which in turn 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."
c. Investing for impact brings good returns
Investing for impact might be worthy – but doesn’t it damage your net worth? Okay, it might be good for the conscience but not so good for the pocket. Surely, if a business is focused on doing good, it’s not focused on making a good return for its investors?
Simply put, the answer is no. As we pointed out, businesses which aim to make an impact are often better placed to perform well in purely financial terms and this is supported by hard numbers.
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, a new study from Moneyfacts, which looked 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, 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%.
d. The taxman’s generosity
For UK investors there’s often another reason to invest for impact, and that’s the generosity of the taxman.
He’s generous for a reason. The government wants to encourage innovative and disruptive businesses and these are often those that have the greatest positive social impact.
It does this primarily through EIS, or the Enterprise Investment Scheme, which was introduced over two decades ago to provide significant tax incentives for those investing in smaller, high risk, unlisted companies.
The most notable of the tax reliefs available stands at 30% of the value of your investment, to be set against your income tax liability for the tax year in which the investment was made and this relief can be claimed up to a maximum of £1m invested in qualifying shares.
Just one such tax efficient investment scheme, it's sister scheme - the Seed Enterprise Investment Scheme - is focused on startups at an even early stage, and so whilst there is more risk involved, the tax reliefs provided are even greater than the EIS - 50% income tax relief on the value of your investment, for instance.
4. Impact investing will only grow in popularity and importance
Governments around the world have become addicted to borrowing, which allows them the political benefits of spending without the political costs of taxing. The result is that total world government debt now stands at US$63trn. Debt as a percentage of GDP increased in 34 of 43 countries between 2006 and 2016. In the world’s seven major advanced economies, the G7, debt as a share of GDP increased by an average of 22.2% between 2008 and 2011.
This means that governments everywhere are faced with the unpalatable necessity of cutting public spending. Arnab Nath, macroeconomic analyst at GlobalData, said:
Rising interest payments on exploding levels of public debt could force many governments to reduce spending on priority areas such as infrastructure, health and education significantly impacting their economic growth which could actually force some governments to declare bankruptcy.
People in developing countries will be particularly vulnerable to cuts in government programmes and this is something increasingly recognised by investors.
According to new research published by Triodos Bank, most investors believe it’s businesses rather than the government that have the power to solve many of the biggest challenges facing the world today. Nearly three-quarters of those surveyed say companies can create positive social and environmental change, while 50% believe the state seems powerless to change society for the better.
5. Impact investing is moving up the agenda
In 2016, the UK government set up an independent advisory group led by Elizabeth Corley, chair of Allianz Global Investors, and made up of 60 senior representatives from across the financial industry and social sector. It produced a report entitled `Growing a Culture of Social Impact Investing in the UK’, which outlines key recommendations to help grow the number of social impact investors across the country and ensure financial providers help people support the issues they care about through their savings and investment choices.
The report urges the government and industry to support co-investment and increase the number of social impact investment opportunities in the market, strengthen competence and confidence within the financial services sector and make it easier for people to invest. It has been welcomed by the government.
And this is not confined to the UK.
Global bank UBS published a white paper - 'Mobilizing Private Wealth for Public Good' - for the World Economic Forum 2017 annual meeting to channel private wealth towards the United Nation’s Sustainable Development Goals (SDGs). The SDGs promote global economic development that’s more sustainable for humanity and the planet. They came into effect on January 2016 for implementation by 2030.
The white paper made a number of significant points:
- Meeting the SDGs will require US$5trn to US$7trn of annual investment
- Household wealth globally totalled US$250trn in 2015 and has huge potential in helping to fund SDGs
- Private investors are less constrained than institutions in terms of their time horizon and regulation on their activities
- Impact investing, which targets a measurable social impact as well as a compelling financial return, is particularly suited to the task
- Impact investing is especially popular with millennials, which is significant given that 460 billionaires will soon hand down US$2.1trn to heirs over a 20-year period.
UBS believes private investment is more likely to yield positive results for SDGs where it’s possible to make a market or attach a market price to capital. Especially relevant are SDGs relating to: zero hunger; health and well-being; education; industry, innovation, and infrastructure; affordable and clean energy; and climate action.
Deciding whether to invest for impact
The above five points provide a useful insight into the world of impact investing as it currently stands - and importantly, details why it can be such an important consideration for investors.
Opportunities are plentiful, targeted returns are attractive and the ability to make a real difference in the world is hugely appealing - but you are still investing and the need to carry out your own due diligence to ensure the opportunities are right for your portfolio undoubtedly exists.
But if it does, and you decide to invest into impact-driven opportunities, you can rest assured you're, at the very least, taking positive steps forward to making a real difference to the lives of others.