You don’t have to sacrifice solid returns with impact investing
AS INVESTORS, we are always mindful of the financial returns of our investments. But how many of us consider the social and environmental impact of those investments?
Historically, most investors haven’t been aware or interested in how their investment capital has been used – just that it produced the expected return. However, considering the impact of an investment can be material to its value.
For example, investors tend to become very cognisant after a scandal causes a material drop in their investment’s value – as we’ve seen in the recent past for energy, textile, or auto companies. However, investors are increasingly allocating capital to initiatives seeking to address societal challenges such as climate change, ageing populations, structural unemployment, and chronic diseases.
The UN Sustainable Development Goals — which committed 193 countries to social, environmental and economic targets for global development — is estimated to require another $2.5trillion, in developing countries alone, to deliver on their commitments. Here, investors have an opportunity to grow their assets while generating impact by supporting solutions to the world’s most pressing problems.
The concept of impact investing has been gaining increased visibility and interest in recent years among governments, companies, philanthropic organisations, financial institutions, investors, academia and the media.
Our Behavioural Finance team conducted research with around 2,000 individuals analysing their attitudes and activity around impact investing. We found that 56pc of investors were interested in impact investing, but only 9pc had actually made any impact investments. While many investors want to get involved, a lack of time, familiarity and support has been creating a latent demand to participate. We define impact investing as “investing to intentionally generate financial returns and societal impact – to protect and grow your assets, and to make a positive contribution to our world”.
One of the key terms in this view is the ‘intention’. Impact investments need to have an eye on both the financial return and societal impact. This is not philanthropy — investors are seeking financial returns for the capital at risk. Neither is this just an investment which happens to have an impact — the intention from the outset must be to seek a positive social or environmental impact.
These investments also seek to measure the outcomes they achieve. Given the early stage of the industry though, providing good quality data is one of the most challenging elements of investing for impact. However, given the increased investor demands, we expect significant improvements in the coming years.
Impact investments are not a distinct asset class. Options for impact investments exist across most asset classes, so investors shouldn’t need to allocate a separate portion of their portfolio to impact investments. Rather, they would look at how many of their investments include impact considerations in their investment approach.
The most frequent misunderstanding about impact investing is that you have to sacrifice returns to have an impact.
Impact investing can add financial value to investment portfolios, ie “protecting and growing your assets”. This could be through incorporating additional considerations into the investment process to select more viable long-term investments, or finding new investment opportunities where organisations are generating innovative commercial solutions to social and environmental challenges.
Consider institutional investors active in impact investing who, as part of the Global Impact Investing Network, annually complete a member survey. For those investors targeting market rate returns, they reported 9pc of their investments were underperforming, whereas 66pc were in line with expectations, and 25pc were outperforming.
The best way to determine whether impact investing is relevant to you is to consider whether you have any preferences for any of the following: • Preventing your capital from funding companies/investments that potentially harm people and/or the planet; • Allocating your capital to companies generating positive societal outcomes; • Using your capital to target pressing social and environmental issues.
The most visible and recognisable form of impact investing has been providing financing to early stage businesses addressing social and environmental challenges.
However, they are not the only impact investment option or way to invest for impact. We believe it is possible to incorporate impact in investment decision-making when selecting publicly-listed companies.
Additionally, investing in listed companies with this intention in mind can, in itself, be catalytic insofar as it generates behavioural change among businesses, driving them to think about the overall outcomes of their operations beyond the bottom line, the impact they have in the environment and communities, and the role they may want to have in society. This presents an opportunity for comparable financial returns.
We do emphasise that any investments require careful consideration. Values can fall, as well as rise. We would recommend that you should always seek independent advice in this regard.