Impact investing had hardly been heard of little over 10 years ago. In fact, Google Search Trends shows just minimal levels of interest in 2008, and looking back a few years prior to 2004, there was no search interest in the phrase from April 2004 to September 2005.
It could therefore be justified for one to ask if ‘impact investing’ is a fad, or in other words, a bubble.
But these investments in projects or enterprises with significant, positive social impacts are forecast by the leading investment bank JP Morgan to be worth some US$1trn in about two and a half years.
This would seem to be supported by a record of impressive growth. According to research by the EIRIS foundation, in 2007, investment in UK green and ethical retail funds totalled around £8.9bn. A decade later in October 2017, this figure had doubled to an estimated £16bn. This 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.
So, if impact investing is a bubble, then it’s a big one. However, there are good reasons for believing that the continued, growing popularity of investing for impact does not represent a passing fad but that it’s going to be a long term trend which in many ways is only in its early stages.
Impact investing is on the rise
David Galipeau is the founder and chief of the United Nations Social Impact Fund (UNDP-UNSIF), which brings together venture philanthropists, family trusts, foundations, corporations, governments and private sector investors to create a sustainable development goal, SDG, ‘blended financing’ platform – balancing both social and economic returns.
In an address to the Impact Investing World Forum 2017 he looked at what SDGs are going to look like in 2030, driven by factors such as climate change, urbanisation, poverty, threats to health and to human security, and unfair distribution of benefits caused by unequal access to human rights.
Impact investing will also be driven by a new generation of investors.
“There’s a huge transition of family offices, moving from patriarch led family offices to matriarch led family offices which have a different value system. There’s a huge shift from legacy wealth to in the West to newly created wealth in the East, where a lot of western wealth has been around for hundreds of years and has a lot of history and a lot of habits whereas the new wealth doesn’t. In the East investors are open to new ideas and they are very concerned about how they will become responsible investors."
In recognition of these long term trends, the United Nations Social Impact Fund is about to launch its own US$200m fund which will invest in food and agriculture, cities and urban areas, energy and materials and health and well-being.
But impact investing is not only being driven from above by an international giant such as the UN, but also by pressure from below. According to research by Triodos bank, 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 64% of investors would like to support companies that make a positive contribution to society and the environment.
Triodos’ research also revealed that most investors believe that businesses and not the governments have the ability to address many of the biggest challenges facing the world. Nearly three-quarters said companies can create positive social and environmental change, and half believe the state seems powerless to change society for the better.
Government itself seems to recognise this. In 2016, the UK government set up an independent advisory group to answer the question:
How can the providers of savings, pensions and investments engage with individuals to enable them to support more easily the things they care about through their savings and investment choices?
The review was led by Elizabeth Corley, chair of Allianz Global Investors, and an independent advisory group made up of 60 senior representatives from across the financial industry and social sector.
Their report Growing a Culture of Social Impact Investing in the UK, makes some key recommendations to encourage more social impact investors in the UK and to ensure financial providers help people support the issues they care about through their savings and investment choices.
The report says:
“A recent survey of 1,800 individuals in the UK revealed that 56% had at least a moderate interest in impact investing, but only 9% had already invested…there is a real opportunity to build on a history of social impact innovations in the UK and contribute actively to global sector leadership.”
The report – which has been welcomed by the government - also recommends that government and the social sector should aim to increase reporting of the growth of the social impact investment market to give the financial services community a better understanding of the non-financial outcomes. The advisory group also underlined its commitment to building on their work to date to sustain momentum in developing the UK’s social impact investment market.
Make an impact whilst seeing a return
Naturally, even the most philanthropic investor also wants to make a decent return on his capital. The evidence is that impact investments give at least as good a return as traditional investments.
A recent article by Mark Haefele, chief investment officer of UBS global wealth management points to more than 2,200 academic studies over the past 40 years which have analysed the relationship between environmental, social and governance (ESG) factors and corporate financial performance. According to a meta-study by Friede & Busch, more than 90% of them have found that ESG factors have a positive or neutral impact on financial returns. It says:
"The results show that the business case for ESG investing is empirically very well founded."
So, we can have every confidence that the rise in impact investing is far more than a bubble. It addresses long term global issues more effectively than governments and, for that reason, enjoys the active support of national and supranational governments and organisations. In the case of the UN, this support is backed by hard cash. Impact investing also appeals to the desire among investors that their money should be put to use to make a positive difference to society and, by generating good returns, it makes financial sense.
As David Galipeau told the Impact Investing World Forum 2017, "Impact investing is about to go mainstream."