Key features of impact investing:
- Generates financial returns – impact investing is not philanthropy
- Generates social & environmental performance
- Uses the UN’s 17 Sustainable Development Goals (SDGs) as a roadmap
- Primary investment focus is on the products/services sold by a company, not the operations (how the company is run
- Measurement of social and environmental impacts alongside financial performance
- Innovation typically plays a strong role in the underlying investments
- Long-term horizon
- Active ownership/engagement
UN Sustainable Development Goals as a roadmap
Perhaps most crucially, there is a commitment to measure the impact created, alongside any financial return profile.
Increasingly, there is also common usage of the United Nation’s Sustainable Development Goals as a roadmap.
The 17 goals address many of the most urgent problems we face in society and with the environment and are the closest thing impact investors have to a standardised framework.
The annual investment required to address the UN’s SDGs has been estimated at $5 trillion - $7 trillion.
Developing countries represent at least 64 per cent of total investment needs ($3.3 trillion to $4.5 trillion) with Africa accounting for half of that.
The total $5 trillion to $7 trillion needed represents 7 per cent to 10 per cent of global GDP and 25 per cent to 40 per cent of annual global investment and much of this needs to be funded through private investment.
Finding and supporting the enablers of these goals and beneficiaries of this capex spend is a key tenet of impact investment.
Today, public flows represent $1.6 trillion and private flows represent $1.9 trillion.
The UN’s 17 SDGs were established in 2012 and all 193 UN members have adopted these goals and are working towards them. With such widespread take-up, the goals have become a de facto blueprint for the impact investment world.
This is helpful in terms of defining and measuring the impact an investment can make, and, of course, ensuring it is aligned with the UN’s aims.
The UN SDGs were designed for governments as well as companies and not all of them present viable investment opportunities.
The goals which focus on developing clean energy and sustainable economies offer significant opportunities and this can be seen by the growth and prevalence of renewable energy businesses in public markets.
The market is also seeing a rising number of healthcare businesses which can be viewed as generating a positive impact (either through product innovation or commitment to underserved segments of society).
Goal 5, Gender Equality, highlights the challenges of the SDGs for impact investors as well as the opportunity.
It is possible for all companies to contribute positively to gender equality, but it is highly likely they will do this through their own hiring and training programmes rather than through their revenue streams.
However, as investors, we must exercise caution; not all of these targets are accessible through direct investment (this is particularly the case with listed securities).
It is critical to the credibility of impact investing (and ultimately its effectiveness) that the intentionality of investments is thoroughly stress-tested.
The main differences between impact investing and ESG
Questions appear on the last page of this article.