The term impact investing was only coined for the first time at the 2007 Rockefeller Foundation, yet in a little over a decade, it has grown significantly in popularity and importance - so much so that many aspects of it are still widely unknown.
With lots to discuss, we've picked out nine of the most notable points in our view.
1. It’s big
According to research by the EIRIS foundation, in 2007, investment in UK green and ethical retail funds totalled around £8.9bn. 10 years later this figure had nearly doubled to an estimated figure of just over £16bn. This would seem to be borne out 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.
But it’s a global phenomenon, not confined to the UK. An indication of this is insurance giant Swiss Re, which announced it was moving its entire US$130bn investment portfolio into new, ethically-based benchmark indices.
2. It’s getting bigger
The Global Impact Investing Network’s 2018 survey of its members, which include fund managers, banks and pension funds, found that together they manage more than US$228bn in impact investing assets – exactly double the previous year’s figure.
There’s plenty of potential for more growth, with a large, untapped desire for impact investments.
According to research by Triodos bank, the majority of UK investors want to see a fairer and more sustainable society, yet two-thirds have never been offered ethical funds despite the fact that 64% of investors would like to support companies that make a positive contribution to society and the environment.
It’s hardly surprising then that a report by the leading investment bank JP Morgan forecasts that impact investments will be worth US$1trn in about two and a half years.
3. Impact investments are more diverse than you think
Impact investing is not just about avoiding harmful activities, such as tobacco or sweat shop or child labour. Real impact investing is also a matter of backing businesses or projects engaged in providing a positive social impact.
Nor is it limited to funding businesses or projects which are environmentally sustainable, such as renewable energy generation or recycling. While these certainly can be impact investments, they’re very far from being the only activities which qualify.
Generally now, when people talk about ethical investing or impact investing, they refer to ESG (environmental, social and governance). This broadens the scope of impact investing way beyond what is considered 'green’.
On the topic, The World Bank says:
“ESG investing is increasingly becoming part of the mainstream investment process for fixed income investors, as opposed to a specialist, segregated activity, often confined to green bonds.’’
In 2011, the Global Impact Investing Network presented the first Impact Reporting and Investment Standards (IRIS) performance data report, looking at a diverse set of organisations receiving funding from, and working with, leading impact investment intermediaries.
The organisations described in the report operate around the world, working to support impact objectives that include development of clean alternative energy, access to financial services, and cultivation of agricultural products.
This report drew upon information from 2,394 organisations, including from the portfolios of seven impact investment intermediaries, and from 1,931 microfinance institutions. Investments covered sectors ranging from education and energy to housing development and information and communication technologies. In total, there were some 14 sectors represented across the globe.
4. Impact investments give good returns
There is a growing body of evidence that impact investments perform as well as, if not better than, traditional investments.
A Harvard Business School study, as reported in Money Week, constructed a hypothetical case, whereby in 1993, someone had invested in a select group of public companies that focused narrowly on financial returns. After 20 years each dollar they’d invested would have been worth US$14.46 - but if they’d invested in a portfolio that also took account of the most important environmental and social issues while growing their businesses, that dollar would have been worth US$28.36 after 20 years. In other words, by investing for impact, they would have doubled their money.
Also, a survey by the Global Impact Investing Network (GIIN) and JPMorgan found that 55% of impact investment opportunities result in competitive, market rate returns. The survey also revealed that portfolio performance for impact investments overwhelmingly met or exceeded investor expectations in terms of both financial goals and social or environmental impact.
Now, 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.”
5. They are popular with younger investors
Barclays Bank, in its report 'Investor Motivations for Impact: a behavioural examination', found that millennials are the most active age group when it comes to impact investing. It took data collected for research from 2015 with approximately 2,000 investors and data collected in 2017 by the Advisory Group to the UK Government from 1,000 UK investors.
It found that, in 2017, 43% of respondents under 40 had made an impact investment, compared to 9% of those aged 50-59, and only 3% for those aged over 60. In 2015, 30% of respondents under 40 had made an impact investment, rising to 43% in 2017. This 43% compares to 9% of those aged 50-59, and 3% for those aged over 60.
This is significant, because these are the people who will have money tomorrow. In a white paper 'Mobilizing Private Wealth for Public Good', UBS points out that globally, over the next 20 years, some 460 billionaires will be leaving US$2.1trn to their heirs.
6. They are popular with the rich
Sustainable investments can be included in the wider definition of impact investments and, in a report Return on Values, the bank UBS surveyed more than 5,300 investors in 10 markets on sustainable investing. It found that 39% hold sustainable investments in their portfolios, defined as at least 1% of their investable assets. Additionally, many investors expect to increase the allocation of sustainable investments in their portfolios. Not only that, but 58% of investors expect sustainable investing to become the standard approach to investing in 10 years.
Return on Values also found that creating a better planet is 'extremely important’ to just under two thirds of some of those surveyed. In pursuit of this goal, many investors deliberately base their spending decisions, lifestyle habits and even career choices on their moral values and beliefs. For example, 69% of wealthy investors willingly pay more for products and services from companies whose practices they support.
7. They are popular with celebrities
Hollywood stars Matt Damon and Leonardo DiCaprio are both impact investors, as is US actress Jessica Alba, who co-founded ethical skin care firm Honest in 2011. The company is now valued at more than US$1bn. Alba has also invested in mindfulness app Headspace and Honor senior home care, and is ranked as one of the US’s richest self-made women.
8. They are popular with governments
In 2016, the UK government commissioned a report 'Culture of Social Impact Investing in the UK'. This outlined 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 urged 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.
The report was welcomed by Tracey Crouch, Minister for Sport and Civil Society, and Stephen Barclay, Economic Secretary to the Treasury. In a speech he gave more than five years ago, the then Prime Minister David Cameron extolled the virtues of social investment and said he wanted to make it a success in the UK and then sell it all over the world.
Official approval is by no means confined to the UK. The United Nations Social Impact Fund is launching its own US$200m fund, which will invest in food and agriculture, cities and urban areas, energy and materials and health and well-being.
9. You too can make a difference
Just because impact investing is popular with the rich and powerful, it doesn’t mean that the ordinary investor can’t share in the rewards and satisfaction it brings.
There is a hunger among ordinary investors for impact investments. Research by bank Triodos shows that a majority of investors in the UK favour a fairer and more sustainable society. However, two-thirds of them have never been offered ethical funds, despite the fact that two thirds of investors would like to support companies that make a positive contribution to society and the environment.
But there are plenty of opportunities beyond ethical funds. There are hundreds of highly innovative businesses starting up every year looking for early stage funding.
In recent months, for example, there have been businesses seeking funding in areas such as health research, clean energy, education and training and for activities ranging from ethically sourced meat to eco-friendly dry-cleaning. They are often seeking to raise sums ranging from £100,000 to £500,000 and the ordinary investor can often buy shares for as little as £100.
Your investment could help to make a critical difference to these businesses and, if they go on to fulfil their ambitions of making a real social impact, your investment will have played a significant role.