Sustainability-themed investing, and the more targeted, intentional impact approach, are both gaining ground. This is because many investors realise our economic systems are reliant on social natural ecosystems that are in trouble. It also recognises that the financial world is indisputably interconnected with social and environmental pressures, and so always has explicit intentions and targets outcomes in “underserved” areas. These underserved areas refer to specific global challenges, such as meeting the needs of the “bottom billion”, or addressing critical environmental challenges, such as climate change, water scarcity or biodiversity.
Systemic risks like climate change and growing social inequality are making it increasingly vital for investors to embrace this approach to investing. Impact investing involves directing capital towards addressing the world’s most pressing problems while simultaneously securing targeted, risk-adjusted returns.
Although impact investing is not a brand new concept, it's now becoming more prevalent as portfolio managers progressively embrace the need for investor capital to generate a social and environmental impact while helping investors to achieve their financial goals.
The UN’s Sustainable Development Goals (SDGs), provide an overarching framework for investors to tackle global challenges and set priorities across all sustainable strategies. Many investors understand that the SDG goals cannot be achieved without impact, therefore it’s important that all parties understand the effects of our decisions and investments.
There are three elements to impact investing - intentionality, measurability and finance return. We outline these in more detail here. Addressing these three elements creates a potential for greater success of impacting investment strategies, but framing your approach through additional impact lenses may further enhance it. Some investors may believe they have to lower their expected rate of financial return to truly effect change in a particular area, however, for most investors this doesn’t have to be true.
By harnessing impact investing lenses, portfolio managers can identify the most compelling opportunities across a range of asset classes that have the potential to match or outperform traditional markets. Research by the Global Impact Investing Network (GIIN) has shown that more than 1,720 organisations managed US$715 billion in impact investing as of December 2019. Analysis of their performance showed:
were targeting risk-adjusted, market-rate returns
had performance experiences that were outperforming or in line with expectations
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