Investment Insights
Impact Investing
Aligning your investments with your values
What is impact investing?
Impact investing is an investment strategy that seeks to combine financial return with positive social and/or environmental impacts.
While traditional investing strategies primarily focus on maximising financial return, impact investing aims to create a win-win scenario where investors and society both benefit. This type of investment goes beyond the usual measurements of risk and return to consider the impact an investment will have on society and/or the environment.
The genesis of impact investing
Historically, philanthropy and investing were considered separate endeavours. Philanthropy was the realm of charitable giving with no expectation of financial return, while investing focused solely on generating financial gains. However, the lines have blurred in recent years as individuals and institutions have become more conscious of the interconnectedness of economic systems and social and environmental well-being.
Impact investing emerged as a bridge between these spheres. It allows investors to put their money to work in ways that align with their values, without necessarily sacrificing the potential for financial returns. By doing so, impact investing offers a tangible way to address social and environmental challenges, while still participating in the financial market.
Identifying impact investments
Impact investments can span a wide range of asset classes, including but not limited to equities, fixed income, and real estate. However, these investments share a common theme of aiming for measurable impact alongside a financial return. Here are a few characteristics that generally define impact investments:
Aligning investments with values
For many, the appeal of impact investing lies in its alignment with personal or organisational values. The financial market is neutral; it is a tool that can be used for various ends. However, investors are not neutral. They bring their values, hopes, and concerns to the table. Impact investing enables them to marry their financial strategy with their values as it relates to:
Measuring impact
One of the challenges in impact investing is the measurement of impact. Unlike financial returns, which can be easily quantified, social and environmental impacts are often harder to measure and report.
However, frameworks such as the Global Impact Investing Network's IRIS metrics, the United Nations' Sustainable Development Goals (SDGs), and third-party certification systems like B Corp provide useful guidelines for measurement.
Domestically, organisations like the Southern Africa Impact Investing Network (SAIIN) and others provide platforms for investors, enterprises, and other stakeholders to collaborate on best practices for impact measurement.
Risks and returns
Like any investment strategy, impact investment is not without risk. The risk can be broadly categorised into the two main areas of concern being those related to social or environmental impact, and those related to financial return.
The former includes the possibility that the investment may not bring about the desired positive change. For example, a venture designed to improve education in underserved communities might falter due to poor execution, lack of community buy-in, or political challenges. The impact risk is particularly poignant because these investments are often made with the explicit goal of creating positive change. Falling short of these aspirations can be both financially and emotionally disappointing for the investor.
On the financial side, there is always the possibility that the investment may not deliver the anticipated returns. In some cases, businesses or projects that are aimed at achieving social or environmental benefits face market risks, execution issues, or regulatory challenges that can hinder financial performance. Impact investments can sometimes be in less mature markets or in sectors that are heavily dependent on regulatory support, which adds an additional layer of financial risk.
As always, it is essential to weigh these risks against the potential benefits. Numerous studies and real-world examples have shown that impact investments can hold their own against traditional forms of investing. Whether the metric is return on investment, risk-adjusted returns, or portfolio diversification, impact investments often perform at par with, or even exceed their traditional counterparts. This is particularly true when one considers the long-term perspective. Impact investments often focus on sustainable business practices, social improvement, or environmental conservation, all of which tend to offer more stable and sustainable returns over the long haul. Moreover, these investments can be less susceptible to market downturns that affect companies with unsustainable practices, providing a measure of resilience in volatile markets.
There's a growing consensus that businesses which operate sustainably and ethically are better positioned to succeed in the long term. ESG (Environmental, Social, Governance) metrics are increasingly being incorporated into mainstream investment analysis as indicators of a company's long-term viability and risk profile. This trend lends credence to the idea that impact investing is not just a moral choice, but a sound financial strategy as well.
Market growth and future outlook
The impact investing market has been on an upward trajectory, experiencing exponential growth over the last decade. Data from the Global Impact Investing Network (GIIN) highlights the rapid evolution of this market segment, pegging its estimated size at a staggering $715 billion in the year 2020. Even more encouraging is that the market shows no signs of slowing down, but rather continues to expand at an accelerating rate.
Several driving forces are behind this impressive growth. Firstly, there is an increasing awareness of global challenges such as climate change, social inequality, and resource scarcity. This heightened awareness is not limited to governments or non-profit organisations; individual investors and large financial institutions are also taking note.
Secondly, a new generation of investors is entering the market with a different set of priorities compared to previous generations. Millennials and Gen Z investors are not just keen on making money; they want their investments to reflect their ethical, social, and environmental values. For them, the old dichotomy of choosing between 'doing well' financially and 'doing good' socially is a false one. They believe they can—and should—do both. This has created a virtuous cycle where the demand for impact investment opportunities is fuelling the creation of new funds and investment vehicles, which in turn attracts more investment.
Thirdly, technological advances have made it easier than ever to measure both the financial and non-financial impacts of investments. Sophisticated analytics tools can track a wide range of performance metrics, from carbon footprint reduction to the number of jobs created in underserved communities. This ability to quantify impact adds another layer of attraction for investors, as it allows for a more comprehensive assessment of the return on investment.
Finally, mainstream financial institutions are increasingly incorporating impact investing into their portfolio offerings, recognising not only the market demand but also the long-term viability of investments that consider social and environmental impact. This institutional backing lends further credibility and stability to the impact investing market, encouraging more investors to participate.
