Interest in aligning money to address big societal issues is growing rapidly in the UK and there is both a widening set of terms and a growing range of investment opportunities for investors.
Some parts of the sector are going mainstream, with elements of ethical investing now standard within all funds not just those with an ethical ‘badge’, and the government established a social impact investment taskforce last year that aims to take impact investing to scale.
The evolution of the sector has been inspiring to watch and to be a part of.
The industry is being encouraged by a range of sources, including the governor of the Bank of England Mark Carney, "to integrate sustainability into their own portfolio management”.
This, coupled with recent heightened public awareness and appetite for how money and investments can impact climate change and other societal issues, means that there is undoubtedly a growing movement towards greater mindfulness in ‘good’ investing.
Key Points
- Some parts of ethical investing are going mainstream
- Many crowdfunding platforms offer access to ethical investments
- The industry needs a common taxonomy
Investment options
Investors are now faced with a plethora of options and can broadly select impact related investments by using a sliding scale approach.
In simple terms, these range from 'do no harm'-type investments, to making progress on environmental, social and governance factors, right through to creating positive social or environmental impact-type investments.
The key decisions for the investor are around how much investment risk they are willing to take, return expectations, and liquidity – for example investing in a listed ethical fund or directly in an individual organisation through crowdfunding.
Crowdfunding
A growing number of retail and institutional investors are choosing to make direct investments in impact driven businesses through crowdfunding platforms.
Direct investing enables investors to choose each company they invest in so they can ensure that the investment meets both the targeted financial and positive impact return on investment, known as the blended return.
These types of investment opportunities are attractive to ordinary retail investors due to the ease of access.
Investors are now faced with a plethora of options and can broadly select impact related investments by using a sliding scale approachMany crowdfunding platforms offer bonds and equities (often with tax reliefs attached) and a low minimum investment of just £50 or less, which means that investors can make an informed personal decision and build an investment portfolio suitable for their requirements.
Direct single investments for positive change can be higher risk compared to investing in a portfolio through a fund.
Many investors balance this against the prospect of higher returns, more direct impact and the satisfaction that comes from a higher level of personal decision-making and involvement, which often are the tipping points. And of course, many investors will make direct investments alongside investing through funds.
Direct investments can be transformative – for example, community groups bringing valuable services, renewable energy and retained profits being delivered for local communities, charities scaling up their commercial operations or green tech business raising development finance.
Pioneering organisations are now able to access capital to enable them to do amazing things, which is extremely empowering.
However, as the sector continues to grow and flourish it is only right to ensure the impact is truly positive.
Defining positive impact
With its fast pace and adoption of the terms there is a risk that without common taxonomy and standards there could be a variety of claims as to what positive impact actually is.
Therefore, there are distinct calls to action for both investors and direct impact investment providers to bolster the sector.
For investors to help judge whether an investment is delivering a positive impact that they are happy to support and whether it is within their risk appetite they should look under the bonnet of an opportunity.
Do they trust the investment provider? Is the information easy to access and clear? Do they understand the business and the investment risks involved, as well as what impact they expect to see? Does this investment meet their return and impact requirements?
Becoming mainstream
With more direct ethical investment opportunities out there and with a continuing drive from more investors (and potential investors) to want to use their money positively, direct investing will undoubtedly become more mainstream.
A development economics estimate evaluated the expected contribution to ethical investing by age group and has estimated that 18-34-year-olds will increase their contribution nine fold from 2019 to 2027 to more than £900m. It is an exciting and positive time for everyone involved.
It is clearly the time to have industry-wide definitions on what positive impact looks like and to make navigating the options for investments more straightforward for an average investor.
Finally, while those of us working in the industry will always want direct ethical investments to be predominately known for the impact they deliver, it is also very important to keep letting people know that they continue to match-up alongside mainstream commercial investing as good investments in their own right.
Dan Hird is head of corporate finance at Triodos Bank
