How to invest with an impact

  • Identify the difference between impact and ESG investing
  • Describe some of the main points of impact investing
  • Identify the consequences of impact investing
How to invest with an impact

It is difficult to regard the 2008 financial crisis in anything other than a negative light.

However, for one area of investment, it marked a significant acceleration in prospects.

As investors and society as a whole were left reeling from the real-world effects of the financial crisis, many also asked some very reasonable questions – how could this happen?

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Was it preventable?

Does finance work for society or against it?

Responsible investment no longer looked like an admirable but ‘niche’ field; over the succeeding ten years, it became mainstream. It did this by attempting to answer these questions.

Finance should take its role in society seriously – the supply of capital to corporates should involve looking at the whole business, not just the financials.

Is a company well-run? Does it have a transparent and independent board? Are employee welfare and the environment a factor?

These elements make a significant difference to the risk and opportunities a corporate offers to its stakeholders and therefore, ultimately, its valuation and share price.

This may be partly responsible for why, by 2018, sustainable investing represented USD 31 trillion in assets under management and is still growing at a faster rate than almost any other asset class.

Different approaches

However, sustainable investing is a broad term which covers many, sometimes quite different approaches.

Although the bulk of assets still come under the banner of negative screening/exclusion or ESG integration, there are emerging branches of sustainable investment that particularly resonate with the investor.

Impact investing is one sub-category which has caught the imagination in recent years. It currently stands at less than 5 per cent of the sustainable investing AUM, but is growing at an impressive 67 per cent compound annual growth rate.

Impact investing might only recently have started enjoying this investor attention, but it is an investment approach which is far from new.

The origins of impact investing are in the private markets with a focus on community investment (where capital is directed to underserved communities or areas) and project-based finance aimed at businesses which are serving society’s needs.

The return requirements for this type of investment vary from a straight return of capital, to anything from below to above average market returns. Impact investing has recently evolved to include listed securities, where expectations should be superior long-term risk-adjusted returns.

There are some defining qualities which link all types of impact investment.

Significantly, the focus is on outcomes and the associated impact, so goes beyond the operations of a business and assesses the good or harm caused by its products or services.

The role of impact investing is to strive to solve the world’s most pressing problems by identifying compelling long-term investments.

It is an investment made with the intention of generating a positive social and/or environmental impact alongside financial returns.

Impact investments exist across a diverse range of asset classes and geographies and underlying investment candidates should demonstrate a clear ‘intentionality’ within their business model.