The Rockefeller Foundation coined the term “impact investing” at a 2007 meeting of investors, entrepreneurs, and philanthropists in Bellagio, Italy. Fast forward two decades and we’ve seen demand for sustainable impact investments grow exponentially.
Impact investing refers to investments that generate a measurable social or environmental impact along with a financial return. Over the years, there’s been a movement from “negative screening” of investments (avoiding investments in industries related to alcohol, guns, oil, gas, etc.) to investing based on environmental, sustainable, and governance objectives (ESG) to even more direct impact investing.
Impact investing is attracting new investors and stakeholders, improving and standardizing data and measurement, all while achieving market-rate financial returns. According to the most recent US SIF Foundation Report on U.S. Sustainable, Responsible, and Impact Investing Trends, sustainable, responsible, and impact investing (SRI) assets now account for one in four dollars in total assets under professional management in the United States.
Why impact investments are on the rise
Before 2019, asset flows into sustainable funds had never risen above $2 billion in a single quarter. Morningstar reported that sustainable funds attracted an estimated $8 billion in net flows in the first half of 2019, vastly surpassing the $5.5 billion for all of 2018.
The impact investing market is rapidly growing because it is:
Attracting individual and institutional investors
Nearly 80 percent of respondents to a recent ESG Investor Sentiment Study from Allianz Life Insurance Company of North America said that they “love the idea of investing in companies that care about the same issues” as them.
More individual investors are interested in impact investments, especially millennials and women. According to Accenture and the Internal Finance Corporation (IFC), in the next three decades, $40 trillion in wealth will transfer to women and millennials, populations that have shown strong interest in aligning their investments with their values.
The Global Impact Investing Network (GIIN) has reported that over one-third of organizations that manage conventional investments, such as Morgan Stanley and private equity firms, are now making impact investments. Several foundations are also making significant impact investments, including the Ford Foundation and the Michael and Susan Dell Foundation.
Standardizing impact measurement and management (IMM)
Although no single impact measurement has achieved mass adoption, the expanding availability of frameworks has given investors more reliable ways to gauge impact. Among the latest methodologies is the Rise Fund’s impact multiple of money that is built around calculating impact in dollars and managed by TPG Capital, one of the largest private equity giants.
IRIS (Impact Reporting and Investment Standards) from The GIIN serves as the impact industry’s set of terms with standardized definitions that govern the way companies, investors, and others define their social and environmental performance.
Technology has also allowed greater ties between investment management and social and environmental impact. Technology platforms such as CNote are making it easier for individual investors to get started investing in funds that used to exclusively be accessible by institutional investors, like Community Development Financial Institutions (CDFIs).
Achieving comparable returns to traditional investments
Impact investing has performed well when compared to traditional strategies. A study by Morgan Stanley found that sustainable investments achieve comparable returns with less volatility in contrast to traditional investment products.
A meta-analysis of more than 2,000 studies compared the relationship between ESG and corporate financial performance (CFP) since the 1970s. It determined that “roughly 90 percent of studies find a nonnegative ESG–CFP relation,” with the large majority reporting positive findings.
A 2017 GIIN study that reviewed over 200 impact investors who committed billions to impact investing in 2016, found that about 91% reported that their impact investments were meeting or exceeding their financial expectations. About 66% stated that they were making market-rate returns on their impact investments.
3 trends supercharging the growth of impact investing
Three emerging trends in the impact investing industry have tremendous disruptive potential according to Antony Bugg-Levine, the previous managing director at the Rockefeller Foundation:
- The current urgent need to address social issues;
- an increased interest in impact investing, especially among young people, and;
- structural changes within the investment industry.
All these trends represent important paradigm shifts that are driving the growth of impact investing.
Barriers are being broken down in public and private capital markets, promoting collaboration and engaging new investors. Meanwhile, there are more advocates for a policy environment that enables the impact investing industry to mature and grow.
How the growth of impact investing benefits us all
The concept of impact investing as we know it now emerged in the early 2000s as investors saw the potential to receive market-rate financial returns in the global capital markets, while doing good for society.
Investors began to consider not just investing to avoid certain negative social or environmental factors (negative screening,) but instead to purposefully choose investments that could create more social or environmental benefits.
Today, with the global challenges facing our planet, such as climate change, inequality and social division, there’s an urgent need for impact investing to become a fundamental part of all investment decisions. Traditional sources of capital, like government aid and philanthropy aren’t enough to effect change, given the scale of the problems the world faces.
Impact investing supports a more inclusive and sustainable financial system that balances the needs of shareholders with those of stakeholders. Impact investments can also help drive the transition to clean energy, improve education, and foster innovative technology solutions to alleviate poverty and inequality.
Why the future of investing is impact investing
Over the last twenty years, the impact investing industry has achieved incredible growth and captured the interest of mainstream investors. In the future, it will become increasingly impractical to make investment decisions without regard for the impact on society and the planet.
As impact investing continues to gain momentum among many types of investors, better tools are being developed to help investment professionals understand their clients’ impact goals, and measure and report on the actual impact achieved. The demand for impact investing products is also increasing as fund managers, wealth advisors see the value in providing them.
There are also groups who have evaluated and compiled impact investments into databases so investors can easily find companies and funds that match their values, including T100, ImpactAssets50, and US SIF Sustainable, Responsible and Impact Mutual Fund and ETF Chart.
According to the GIIN’s 2019 Annual Impact Investor Survey, the responses from organizations forecast strong future growth. In 2018, these organizations invested over 33 billion into more than 13,000 impact investments. These same organizations planned to invest over 37 billion into more than 15,000 investments during 2019. This indicates 13% project growth in the volume of capital invested and 14% growth in the number of investments.
Impact investors are also committed to further developing the industry. Most view the impact industry as having a key role in supporting important changes in investment practice, including integrating impact considerations into all investing decisions.
Not only impact investors, but many across the public and private sectors are striving towards a world where investor mindsets and conventional financial markets are fundamentally reshaped by impact investing. The progress the world needs on intense global challenges like climate change and ever-widening inequality is demanding it.