Follow the smart money is an adage that’s as old as, well, money.
The skill lies, of course, in identifying which is the smart money and which is the money being driven by herd instinct to invest in the latest bubble.
It’s been a distinct trend recently that more and more sophisticated investors - the ones looking at that smart money - have been choosing impact investing.
In other words, they’re opting to put some of their capital in projects and businesses that are likely to have far-reaching positive social impacts. It might mean investing in a business that’s pioneering ways to provide clean water in the developing world or researching treatments for dementia.
But impact investing doesn’t only include those serving fields where the social benefit is obvious and direct. It’s also possible to make an impact by investing in areas which are less obviously ‘good causes’, but where the long term social impact can be still enormously beneficial. This might mean investing in businesses which provide jobs and training, or which disrupt an established sector for the benefit of consumers and the wider economy. Think banking or housing.
Those sophisticated investors who’ve been taking this impact investing route are undoubtedly following the smart money.
The growth of impact investing
A report by the Global Sustainable Investment Alliance said that globally, there are now US$22.89trn of assets being professionally managed under responsible investment strategies, an increase of 25% since 2014. In all the regions except Europe - largely because of the tightened definition of sustainable investing - sustainable investing’s market share has grown. In relative terms, responsible investment now stands at 26% of all professionally managed assets globally.
As is usually the case, there isn’t just one single cause that we can point to as lying behind this trend. It’s perhaps partly driven by the millennial generation who – thanks to the internet and social media – are clued up on some of the serious issues facing society and have informed themselves as to which business are genuinely tackling them. Or it may be that they feel empowered by such prominent young business stars as Facebook’s Mark Zuckerberg or Sergey Brin of Google who have shown how businesses can have a global impact.
The 2016 US Trust annual survey of high net worth and ultra high net worth Americans says "Millennials, establishing the blueprint for the future of wealth, exhibit unique behaviours and values when it comes to money. The next generation is powering their optimism with alternative investment types, including asset classes that support positive social and environmental impact as well as tangible assets."
"Giving back is a shared priority across the wealthy. From fulfilling a family tradition of philanthropy to investing in companies that align with their values, many of America’s wealthy are motivated to make a positive impact on their communities, the causes that matter to them, and the world at large."
So, are we saying that priorities have changed for a new generation of sophisticated investors? Are they choosing to let return on their investments take second place to socially responsible investing?
It could be one way of thinking about it, but it’s not the reality - they are simply choosing to have the best of both worlds.
Making a difference whilst seeing a financial return
Sophisticated investors want a return on their investment, otherwise they wouldn’t be terribly sophisticated. They are investing for impact in this way because they’re also convinced that the rewards are at least as good as the alternatives.
In fact, there’s plenty of evidence to suggest that the returns are even better, and there are a number of possible reasons for this, including:
- Businesses which seek to make a positive social impact are not out to make a fast buck. These are organisations which are in it for the long term and so tend to lay firm foundations for sustainable, long term future growth.
- If they’re truly making a social impact then they must be addressing a proven market need, which is not being addressed, or not adequately addressed, by other providers
- Their purpose is to improve lives and increase social good and, in doing so, they are going to create satisfied customers
- Satisfied customers help them build a strong and positive brand image, with investors, employees and customers being enthusiastic brand ambassadors
- They’re able to attract talented employees, the kind of people who have no interest in working for employers whose only concern is the bottom line. These are often creative and passionate individuals; natural disruptors and entrepreneurs.
Whatever the reasons, impact investments can give a good return on investment. They also give the investor the satisfaction of knowing that their money is not only working for them, but for the benefit of society as a whole.
Sophisticated investors are often people who have successfully built their own businesses. They invest in other companies not only for the returns, but for the satisfaction of still being involved in growing a business. With impact investing, they get the added satisfaction of knowing that their capital is having a positive social impact.
Whatever the motivation, socially responsible investing brings a whole new dimension to business funding - by investing for impact, the sophisticated investor can still target a generous financial return while making a genuine difference.