What Is Impact Investing?
GIIN, the Global Impact Investing Network, defines impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return” [1]. The aspect of intentionality of the investor as a defining characteristic of impact investing sets this category apart from ESG investing. In ESG investing, environmental, social and governance aspects are taken into consideration while in impact investing, the investor takes it a step further. Investments are not only focused on companies that conduct sustainable operations, but in companies whose business solutions (products or services) have the potential to fuel social and environmental development.
Picture taken in beautiful Yosemite. Whether it’s protecting nature reserves or fighting for fair working conditions, invest in something you believe in.
The field today
At the end of 2018, The GIIN estimated the total market of impact investing to be worth $502 Billion [2]. This number included investments made by different types of investors, but excluding individual investors. Individual investors in impact make up a small amount of the segment so far, and the reason for this can be that impact investing is a rather new category - the term itself was coined in 2007. Since it hasn’t been around for too long, there are less alternatives in this category available to individuals than there are other types of investments. In addition, everything that is new has a shorter track record which brings a certain degree of uncertainty. Even though the category is in an earlier stage compared to traditional investment alternatives, there is a strong growth in demand for impact investing solutions, even amongst individuals. In the most recent (2019) survey from the GIIN, more than $33 billion was revealed to have been invested in impact in 2018.
According to a report released by Morgan Stanley - Institute for Sustainable Investing [2], 75% of individual investors are interested in sustainable investing. The same number is 86% when asking millennials. Interestingly enough, the same report finds that amongst individual investors, 80% are interested in impact investing solutions customized to their interests and goals.
How does the future look?
There is ample evidence that impact investing is heading towards the mainstream, as shown by the Morgan Stanley report from 2017. However, it is not without any growing pains. Now - three years later - we’re still not quite there.
One of the hurdles to making impact investing mainstream is the perception that investing in impact or sustainability can be likened to some sort of philanthropy, and the myth that this necessarily entails a financial trade-off. Actually, sometimes the opposite is true and sustainability or impact-focused investments do better than the rest of the market. Another hurdle is that both real and perceived barriers to invest in impact are high and concern both personal finances and knowledge.
Linked to the latter, the measuring of impact is not as black-and-white as measuring financial loss or gain. An investor wants to be able to measure the actual impact in an evaluation of her/his investment. When we invest in impact, we want to make sure our investments are generating it. We definitely don’t want to feel cheated by vague metrics or insufficient reporting. Fortunately, developments are continuously being made in the field of impact reporting and metrics and the standardization of these. More on this very important topic in a coming blog post. Stay tuned.
[1] thegiin.org/characteristics