Impact Investing: Making money while doing good

The term impact investing has grown in popularity, and while more recently associated with the younger generation, it is attracting interest from all age groups. In simple terms, impact investment can be described as:-

 

“Investments made with the intention to generate a positive, measurable social and environmental impact alongside a financial return.”

 

Seen by some experts as “just another trend”, the facts, figures and statistics suggest otherwise.

 

What is impact investing?

 

The term impact investing is closely associated with Socially Responsible Investing (SRI), which dates back to the 1960s. There are three core principles when it comes to impact investment:-

 

· Intentionality - This refers to the investor’s aim to achieve positive social or environmental outcomes.

· Measurability - The metrics and different standards used to assess the success of impact investments.

· Additionality - This element covers the provision of capital, which addresses specific market gaps and needs.

 

To put this in context, in 2022, the global impact investment market stood at $420 billion, rising to $495 billion in 2023. If we look back to 2013, a cumulative $40 billion had been allocated to impact investments - demonstrating the considerable increase in popularity. In 2022, it was estimated that funds under management within the impact investment sector stood at $1.16 trillion.

 

Before we examine impact investing more closely, it's important to recognise that it is not some kind of charitable philosophy. It is a means of making money by investing in a socially responsible manner, i.e., having an impact.

 

The financial and social benefits of impact investing

 

As we touched on above, impact investment is not some here-today-gone-tomorrow fad; it is a bona fide means of investing for the good of the environment and society, while intending to make a return.

 

There have been several surveys over the years which have shown that:-

 

· Focused impact investment returns are comparable to traditional private equity funds

· Areas which have benefited most from impact investing include healthcare, housing, agriculture, education and renewable energy

 

As one of the core principles is making an investment return, this means that any impact investment is entered into as a sustainable long-term project. For example, enhanced education (or, in some cases, the introduction of education) can be a game changer for countries and continents, such as Africa.

 

Identifying investments and measuring success

 

It's important to remember that impact investing may be more popular with the younger generation, but it is not a charitable cause. There is still a need for in-depth due diligence to assess the potential impact of each investment. This includes looking at:-

 

· Finances

· Management

· Long-term viability

 

Typically, investors will use the Impact Reporting and Investment Standards (IRIS) and Global Impact Investing Rating System (GIIRS) to measure both the financial return and social/environmental impact of specific investments.

 

Challenges and risks

 

Similar to "greenwashing," "impact washing" is also an issue that occasionally hits the headlines. As the name suggests, these investments have fewer social or environmental benefits than the initial publicity would indicate. Unfortunately, "impact washing" is, to a certain extent, undermining the overall credibility of this concept.

 

The impact investment sector is also affected, positively and negatively, by issues such as:-

 

· Regulations

· Addition/removal of tax incentives

· Investment trends

· Government involvement

 

In general, financial and regulatory issues introduced by governments tend to be more positive than negative as they look to enhance their own impact investment credentials. However, where perhaps a sector is doing better than expected, supported by tax incentives, there may be a temptation to reduce tax payer support and let markets find their own natural level.

 

Summary

 

It is essential to realise that impact investment is not purely for social and environmental reasons but to create a long-term financial return. The introduction of AI, blockchain technology, and supportive regulations will enhance the prospects for this relatively new sector going forward. However, as the majority of these investments are off-market, there can be liquidity issues, although it has proven to be a useful alternative investment strategy. A higher-than-normal degree of risk means taking professional financial advice before investing is essential.

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