Informed investors will have undoubtedly heard about a growing trend known as impact investing.
On the highest of levels, real impact investing is a matter of backing businesses or projects engaged in providing a positive impact to the world around them, be that socially, environmentally or otherwise.
These could be businesses that are involved in the generation of renewable energy, pioneering ways of providing clean water in the developing world, researching drugs to fight malaria, or in providing routes for young people to gain access to education.
An early example would have been Trevor Baylis’ clockwork radio, which he invented in 1991. These were aimed at Africa and other developing countries where mains electric power and access to batteries was limited. The product had a huge impact and was praised by Nelson Mandela.
But there can also be socially responsible investing in less obvious businesses where there isn’t an clear ‘good cause’ association, but where the long term positive social impact can still be enormous. This might be a business which provides jobs and training, or which is disrupting an established sector for the benefit of consumers and the wider economy, perhaps a challenger bank or a business building much needed homes and addressing the UK’s housing crisis.
Investing for impact is no longer a novelty in the financial world
According to Impact Investing Network, since 2012 impact investments have grown by 107% and now account for over 18% of funds under management.
Swiss bank UBS has more than a third of its total invested assets in sustainable investments with a value of more than SFR 1.1trn.
These investors are not sentimental - they are professionals who have to answer to clients and shareholders and deliver a decent return on investment. They have chosen impact investments not on a whim but because they are confident that they can make a good financial return.
Research by the investment analysts at All Street support this. They looked at the returns generated by impact investments to date. One group of venture capital funds, for example, generated an internal rate of return of 9.5% over the period studied, comfortably outstripping the broader venture capital sector. Meanwhile, funds with a social mission generated investment exits with an average internal rate of return of 33.5%.
Growing accessibility of impact investment opportunities
And the good news is, whilst such investment opportunities may have once been restricted to experienced and professional investors, or investors within small, private networks, that’s anything but the case today.
The continued growth of crowdfunding and equity co-investment platforms continues to open up investment opportunities to a wider market than ever before, and impact investment opportunities are undoubtedly forming part of this.
The obvious benefit of this is that it means almost anyone can add impact investments to their portfolio - or even start their portfolio with impact investments. However, it’s often believed that investments into companies - whether they’re impact-driven or not - need a large bank roll, but it’s important to remember that such platforms very often have low entry points. At GrowthFunders, for example, our minimum investment amount for most opportunities is just £100.
Not only does this mean you can essentially become an impact investor for just £100, but it means you can diversify your portfolio with a variety of impact-driven investment opportunities for what many traditional platforms would require as a minimum investment amount for a single investment - £500 or £1,000 can now see you able to invest in five or 10 impact investment opportunities realistically.
Now of course the same risk warnings apply to any other investment opportunities and you need to do your own due diligence and ideally take advice from a financial professional before making any investments, but if you’re confident in the opportunity, the ability to invest has arguably never been easier.
Asking the right questions before you become an impact investor
But whilst the open accessibility of impact investment opportunities is undoubtedly a positive, these opportunities have brought with them a whole new set of questions and criteria that needs to be considered. Moving away from the more traditional investment questions, you now have to look at the effects the company may have further to your investment.
- Is the business addressing a real social need? If so, what is it? Is it genuinely needed?
- Is the company and their products/services something that interests or motivates you? Are you knowledgeable of the industry and the needs of the audience?
- Is this a need that can be usefully tackled commercially? Is it one where the solution can be scaled?
- Is the business genuinely committed to having a positive impact or is it only trying to burnish its image?
What’s interesting with these types of questions is they’re effectively directing investors to take a different approach to their thinking when assessing an opportunity. These investors may be confident in researching a potential investment by interrogating the traditional indicators and metrics - the financials, the business plan, the management team, the market and so on - but with impact investing there’s a whole new dimension to take into account, a dimension that isn’t always as black and white as more traditional ones.
For this reason, it’s not necessarily surprising that in many instances, the world of impact investing is driven by millennials. There’s been plenty documented about this generation wanting to do genuine good and effect real change, and this naturally iterates itself in impact investing. As a result, investors in this generation are often focused primarily on the impact aspect and the more traditional aspects secondary.
All investors are targeting some type of financial return, but it’s widely appreciated that millennials are using the open accessibility of investing today to invest in opportunities that will make real change, and wouldn’t be concerned about forgoing a greater financial return if the impact they can have will be greater.
Becoming an impact investor
Impact investments aren’t restricted to the rich and famous, or the seasoned investors. They’re open to everyone today. The opportunities are plentiful and the accessibility to them is so streamlined that if you want to be involved, you generally can be relatively easily.
As mentioned, the same stipulations apply and it’s vitally important you do enough due diligence to feel confident the opportunity is the right one for you, but with so many impact investment opportunities, there’s little doubt you’ll be able to enhance your portfolio with impact-driven investment opportunities regularly.