The rise in impact investing has coincided with a growing awareness of climate change and wider environmental, social and governance (ESG) issues.
Only very recently there have been several instances of extreme weather conditions, including hurricanes, which have hit North and South America, causing untold damage.
As the impact of climate change is becoming harder to ignore, so more investors are interested in measuring the positive impact their investments have.
The key word there is ‘measuring’. Impact investing is characterised as a more measurable way for investors to consider their investments.
According to a May 2017 Standard Life Investments report titled ‘Impact Investing’, JPMorgan research reveals demand for impact investing may reach $1trn (roughly £0.75trn) by 2020.
This suggests not only that asset managers will capitalise on this by launching more impact strategies but also that investors will gain a better understanding of what it is and how it works.
Bonny Landers, head of sustainable, responsible and impact investing at Sandaire, notes: “I think absolutely climate change is the key that has made everybody sit up and notice because it really does effect everything. It effects our health, it effects companies and how they do business.
“I think it really has come home to people that this is not sustainable, and I know that word is overused but I use it properly. What we need to look for are ways to counteract it.”
Gary Waite, portfolio manager at Walker Crips, says impact investing funds have a dual purpose – “to address environmental/societal challenges as well as produce an ‘acceptable’ financial return”.
“Where most socially responsible investing adopts a passive ‘do no harm’ approach, impact investing actively seeks positive change.
“One of the key differences of impact investing versus other forms of ethical investing is the requirement to measure and report the social and environmental performance of underlying investments,” he explains.
The Standard Life Investments report sets out the main characteristics of impact investing:
- Seeking positive financial returns – a company should have clear financial return targets
- Mission-led business objectives – a company’s strategy should clearly outline how its operating model is designed to achieve a specific positive societal and/or environmental impact
- Measurable outcomes – a company should aim to measure and disclose the positive contribution to the environment and society in relation to its stated goals.
Andrew Parry, head of equities at Hermes Investment Management, notes that impact investing is long-term, with a focus on companies developing new capabilities that meet specific needs of society in what he calls a “mission-led manner”.
He insists: “It goes beyond best-in-class ESG practices or a well-developed corporate social responsibility programme, requiring investors to identify companies that are mission-led and which have a clear approach for delivering additional and measurable societal benefits that will endure over time.”
Mr Parry outlines three key concepts that impact investing brings to the public domain:
- Intentionality – the intention of an investor to exert a positive social or environmental impact;
- Fulfilling a good cause beyond the provision of private capital;
- and measurement – being accountable and transparent in reporting on the financial, social and environmental performance of investments.
One step ahead
Some asset managers have gone further than simply offering impact investing funds or ethical investing strategies to clients.
Jupiter Asset Management announced in September it has joined The Climate Group’s RE100 Initiative, thereby committing to sourcing 100 per cent of the energy consumption in its leased offices from renewable sources by the end of 2017.