In our recent blog post, we introduced the concept of ESG and what this term means for investors. Here, we introduce impact investment, what it means and look into its growth in recent years and whether investors can genuinely make a financial return when investing in impact.
Although the term was first introduced in 2007, impact investing has been around for many years. In brief, Impact investing is an investment strategy where investors seek out specific social or environmental benefits from their investments beyond just gaining a financial return. Whereas an investment through an ESG lens may look to avoid negative impact, an impact investment will look to generate a measurable positive impact on social or environmental issues.
The theory of impact investing is that by choosing to channel capital into investments that positively impact our environment and societies, investors can have a transformative effect on a positive future. Essentially, Investors are looking to the private sector to solve some of the world's most pressing issues and using their money as a force for good.
As with all investments, the exact method and amounts will be dependent on the individual person. Depending factors include their risk appetite and how impact or financially driven they are. For example, finance-first (prioritising return) vs impact-first (prioritising impact) investors, depending on what is more important to them. Impact investments can be made through a range of asset classes, including - equity, private equity, loans, cash deposits or hybrid forms. Impact investment has attracted a wide range of investors from everyday/retail investors to fund managers, right through to religious institutions. A few examples of impact investment may be renewable energy, community development projects, education, health, microfinance and many more.
Some consider impact investing to be an extension of philanthropy; however, impact investing challenges the theory that social and environmental issues can only be addressed by charitable donations. To be clear, impact investments are always made with the expectation of a financial return or for the enterprise to become financially self-sufficient. It is therefore not a charitable donation or grant. So how do impact investments actually perform?
Well, according to the GIINs (Global Impact Investing Network) ‘2020 annual Impact investor survey' only 88% of investors believe their impact investments are either performing as expected or overachieving. In the same report, only 1% of investors feel their investments are underperforming on impact. Thus proving you can indeed create impact alongside a financial return.
The growth of impact investing:
The growth of impact investing has been monumental in recent years. In their Impact investor survey mentioned above, The GIIN estimated a total global market size of $715billion at the end of 2019. Incredibly doubling each year from 2017. In addition to this, The International Finance Corporation estimates that the pandemic has prompted an increased awareness in impact investing, suggesting $2.3trillion was being invested for impact in 2020 - a whopping 2% of global assets under management.
With the climate crisis rising up the agenda on investors’ minds, it is not just environmental investments that are growing, it is social investments too. According to Big Society Capital, one of the UK's largest social impact investors found that social impact investing has grown 8 fold in the time from 2011 to 2020, from £834m to £6.4m.
Who is driving the trend?
Millennials have been a huge driving force behind the shift towards impact investing. This is predicted to grow even further, particularly when you consider millennials in the US alone are set to inherit around $30 trillion from boomers in what is being coined the 'Great generational wealth transfer'. However, it must be noted that all generations are now getting in on the act!
As an impact investor, it is vital to ensure you understand the holistic impact an investment may have. With Etcho, we'll show you how well a company aligns to 17 different goals, therefore allowing you full transparency of an overall impact. So, if seeking impact is important to you, why not join our waitlist for priority access to the app.