Over the last decade, impact investing has emerged from obscurity to become one of the hottest global investment trends.
Its appeal has grown under a perfect storm of factors; As reported below, global challenges have intensified demand for impact investors, there are now more impact investment opportunities than ever and younger generations have more money and inclination to back impact projects.
Its universal appeal, however, is that it enables investments that turn a profit AND have a positive environmental and/or social impact. But the sector is a relative baby compared to other asset classes. So is it here to stay? Here are eight facts that suggest impact investing is no passing fad…
The world is relying on impact investors
At an historic United Nation summit in 2015, world leaders adopted 17 sustainable development goals. They came into force the following year and are designed to mobilise countries the world over into tackling climate change, ending poverty and fighting inequality.
The 17 goals have become a common reference point for impact investors and fund managers as a means of measuring performance and focusing efforts on maximising their positive global impact.
Impact investment vehicles and investors could have a prominent role to play in pursuing these vitally important goals.
The concept is already at least a decade old
Forbes magazine reports that the term ‘impact investing’ was coined in 2007 by the Rockefeller Foundation as a new way forward for capital.
And even then, its roots could date back further, with the asset class likely to have emerged out of longer-established approaches such as socially responsible investment - the selection of investments through environmental, social and governance criteria.
Big players are now involved
Major investment banks tend not to jump on passing fads. If their growing involvement in impact investing is anything to go by, then it looks to have a long and bright future.
Global financial empires Blackrock and Goldman Sachs both now have divisions specifically devoted to managing impact investments.
Other particularly active players include Barclays, UBS, JP Morgan and Credit Suisse.
The 2016 paper produced by the chief investment office of UBS, entitled Doing well by doing good concludes that: “We appear to be at the beginning of an opportune time for impact investing, as more private investors seek to make meaningful differences alongside profit in their portfolios; and public sectors increasingly seek to plug funding gaps for crucial social, environmental and development problems.
“As the industry matures, we believe that UBS stakeholders, specifically clients, will have a plethora of innovative and effective options to make a difference in an increasingly satisfying and fulfilling manner.”
This certainly sounds like UBS at least is backing impact investing for the long haul.
Consumer demand is shifting
Evidence suggests that younger generations are more inclined to invest in and buy from businesses that have a positive impact on the world.
Around 30% of millennials questioned by Deloitte in 2014 said they believed improving society should be the number one priority of businesses.
More recent research by Spectrem Group in 2018 found that more than half of millennial investors (52%) see the social responsibility of their investments as an important selection consideration. This compares to less than 30% of investors in the ‘baby boomer’ generation and 42% of those investors in the Gen X generation that preceded millennials.
But more generally, impact is rising up the consumer agenda, as highlighted in a recent UBS study that shows 71% of consumers avoid buying from businesses with “perceived negative environmental, social and governance (ESG) practices”.
More money will flow into the impact pipeline
The Center for Financial Inclusion reports that some US$40 trillion in wealth will be transferred during the next 30 years to women and millennials in the US.
While more and more millennials are increasingly engaged in impact investing, the CFI says women are also statistically more likely to focus on impact.
It says: “Both of these groups have expressed strong interest in investing aligned with their values, with millennials demonstrating they are deliberate about the social impact of their retirement funds.”
Governments are joining the party
When David Cameron was president of the G8, the then British Prime Minister oversaw the launch of an independent Social Impact Investment Taskforce.
Its aim was “catalysing a global market in impact investment”. The Taskforce created National Advisory Boards for each member state which continued when the taskforce was expanded into the Global Steering Group for Impact Investment in 2015.
This now has 21 countries on top of EU members on board, bringing together leaders from finance, business, and philanthropy. The World Economic Forum has also been influential in focusing the global agenda on impact investing.
It’s getting smarter
As impact investing matures, the sector is become increasingly sophisticated in terms of measuring impact.
A growing body of data from which to monitor the impact of investments is being complimented with advancements in data-gathering technology.
For example, MIT spin-out Distilled Analytics is aiming to harness artificial intelligence and data science to revolutionise how companies and investors measure impact.
Giving investors more certainty and transparency about the real impact of their funds will almost certainly help the sector to grow.
The numbers speak for themselves
Although impact investing is still in its relative infancy, financial data suggests it is on a rapid growth trajectory.
The Global Impact Investors Network (GIIN) says the value of impact investment assets almost doubled between 2017 and 2018 to US$228bn; and this was only among investment houses taking part in its annual survey.
Meanwhile, the global socially responsible investing (SRI) market was worth almost USS$23 trillion in 2018, JP Morgan reports.
This study showed that environmental, social and governance (ESG) focused assets in the US had grown in value by 200% over the preceding decade.
The growth of organisations within the sector also points to a long-term trend, rather than fad. Global impact investment club Toniic, for example, saw the value of it members’ investments soar from US$1.65bn in 2016 to US$2.8bn in 2018.
If impact investing really is a passing trend, swathes of decision-makers in global institutions, banking giants, startups and governments have made a major misjudgement.
It seems implausible that impact investing will not continue on its sharp growth trajectory and become an ever-expanding presence in mainstream finance for years to come.