A closer look at impact investing

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The times, they are a changin’

A closer look at impact investing

It is been just over a decade since the term ‘impact investing’ was coined by The Rockefeller Foundation, a concept that is refreshingly simple.

It is an investment approach that aims to make a positive contribution to society or the environment, alongside an attractive financial return.

In that time, impact investing funds have amassed more than $228bn (£176bn) under management, according to the Global Impact Investing Network.

For the UK impact investing market, which is seen as one of the most vibrant in the world, it feels that we are at a point in time where the fundamentals are changing, and impact investing is moving from a specialist strategy to a fully fledged investment style.

Building an impact-focused investment portfolio

While ESG investing has been gaining in popularity, it has its limitations. This approach typically selects companies whose operations across environmental, social and governance matters is better than industry peers, irrespective of the impact of its product or services.

As an aside, it is worth checking your so-called ‘ethical’ or ‘sustainable’ portfolios for exposure to sectors such as fossil fuels, arms and tobacco. 

Key Points

  • Impact investing makes a positive contribution to society
  • Better data is available to understand impact
  • Companies held by positive impact portfolios are growing faster than FTSE100

Impact investing goes a step further by identifying companies whose products and services are helping to tackle various social and environmental problems, naturally avoiding companies with harmful core activities.

Measuring impact

The most prominent feature of impact investing is its focus on measuring the social and environmental return that it generates. However, evaluating the impact of the products and services produced or provided by these companies has proved to be quite challenging.

Thankfully, impact reporting has taken a huge step forward in the past couple of years, with better quality data and shared insight. The likes of Impax, WHEB and Threadneedle have been leading the way with their own impact reports.

The important thing is to show how every investor can make a positive impact through how they invest their money. Key to this is presenting the social and environmental results generated by the investments they make, and we at EQ Investors share these findings in our annual impact report.

Sustainable development

Following on from last year’s inaugural report, we have once again adopted the UN Sustainable Development Goals as a framework for identifying and reporting on the impact achieved. 

The SDGs are a collection of 17 global goals set by the United Nations Development Programme and shine a spotlight on some of the world’s biggest challenges.

The SDGs cover social and economic development issues, including poverty, hunger, health, education, global warming, gender equality, water, sanitation, energy, urbanisation, environment and social justice.

The United Nations estimates that achieving the SDGs by 2030 will cost between $5tn (£3.8tn) and $7tn (£5.4tn), with an investment gap in developing countries of about $2.5tn (£1.9tn). Impact investing is one approach that will help fill the gap. The goals represent a huge opportunity for forward-looking and innovative companies – just the type we want to capture within the portfolios.