The rise of impact investing

And why doing good is good for business

By Renee Fortune

Up until very recently, decisions that investors made were based on two primary dimensions: risk and return. Traditionally, this is how the potential of any investment was weighed up, where generally, higher risk correlates with higher return. In the past few years, a new dimension has been added to the equation: impact. Let’s take a look at how this all unfolded.

It started with ESG

This may come as a surprise, but (Environment, Social, Governance) ESG investing began in the 1906s. Generally speaking, a company’s ‘ESG’ rating or status described how its operations affected the environment, their employees and immediate communities, and their management, investors and stakeholders. Back in the 1960s, the major ESG issues centred around labour law and ethics. For example, many investors during that era excluded tobacco production companies from their portfolio, or firms that had political connections that were deemed unethical.

Impact investing – a new frontier

Fast-forward a few decades and ESG is now a major determinant of investment decisions, although with the unique challenges of the contemporary world, ESG has taken on a somewhat different form. For a brief period, ESG investing was referred to as “Sustainable Investing”. Today, these factors fall under the umbrella of “Impact Investing,” and this new socioeconomic dimension is revolutionizing financial markets on a global scale.

In a very short space of time, the world has changed beyond recognition. This accelerated change was brought on by the onset of the Fourth Industrial Revolution, the rapid advancement of digital technology, the emergence of social media, and the effects of the COVID19 pandemic, which ushered the world into a new and unfamiliar dispensation we now refer to as the ‘new normal’.

The question that investors all over the world are asking themselves is: ‘what kind of world am I investing in?’.
For many (and this number is increasing exponentially), the answer is an equitable world – one that is fair and just and built on values like mutual cooperation, peace, sustainable development and social welfare.

The statistics

According to the most recent Annual Impact Investor Survey, conducted by the Global Impact Investing Network (GIIN), the current market size has reached an estimated $715 billion. This growing figure is illustrative of the supply of capital allocated to companies that make an impact environmentally and socially.

Impact investors are equally concerned about the potential risk of their investments and the return those investments will produce, as they are about how the companies they invest in, will impact the world.

A recent report produced by Barclays Private Bank, GIST Initiatives and Campden Wealth provided some encouraging findings:

1. The proportion of respondents who view impact investing as their primary investment strategy grew from 15% in 2019, to 18% in 2021.
2. A further 45% have multiple impact investments across different asset classes/causes.
3. The majority (52%) of traditional investors who indicated they are not involved in impact investing have changed how they make decisions about their traditional investments.

The business case for impact investing

Previously, there was a global perception that there is a trade-off between profitability and sustainability, but more research is emerging to prove the very opposite: doing good is good for business. In fact, according to the same report, 80% of investors argue that investors do not have to give financial returns in exchange for impact.

Additionally, 36% of the investors that were surveyed, stated that they believe that incorporating sustainability considerations into investments will lead to better investment returns/risk projections.

In a period of unprecedented economic uncertainty, impact investments are delivering solid financial returns, with the majority of respondents claiming that their returns met or exceed their expectations.

Within governments, the private sector and civil society, the sustainability agenda is gaining some serious traction. These efforts align with the United Nation’s Sustainable Development Goals, which require its 193 member countries to work together to achieve 17 key objectives that concern the wellbeing of the global population and the conservation of the earth’s invaluable natural resources. In addition to being critical to a sustainable planet, the transition to the UN SDGs is estimated to represent a $17trillion business opportunity.

For sustainability activists, the rise of impact investing means that the private sector is suiting up and showing up in a way that supports the global movement to curb climate change and give previously underserved communities the impetus and resources they need to develop, grow and thrive. It’s taken a long time, but the wheels of change are turning.