Shifting its path from being niche to mainstream, impact investing is gaining popularity at an accelerated rate. The organizations that specifically deal in responsible investment are broadening their horizon to incorporate impact strategies aimed at providing individuals and the planet with direct benefits. Institutional investors are spearheading this initiative as they have become a significant source of impact investment capital.
The rising awareness of sustainability issues have led to the rapid progress of impact investing. Due to this, investors have been formulating better strategies and products to include in their portfolio. Furthermore, companies are positioning themselves as thought leaders before the investor network to emphasize on their concerns regarding result and impact.
What is impact investing?
Impact investing involves financial investments that are specifically focused on entities that create positive footprints on the environment and society, and those who promote ESG efforts. In other words, such investments are intended to generate valuable, quantifiable impact on the environment and the society in addition to financial returns.
Several investors who are looking to address concerns like “my money can do much more than just bring returns” are increasingly starting to demand impact products. In contrast, there are many institutional investors who have a different focus area and prefer to examine their portfolios from a sustainability and risk management standpoint. They want answers to questions like “What can we do to protect our assets in the long-term?” Traditional investment firms are catering to both types of investor requirements.
The concept dates to 2008, when there was an emerging debate on how to use capital differently. The Rockefeller Foundation first coined the term impact investing. According to a report by JP Morgan, impact investments are an emerging asset class with the potential to offer, over the coming 10 years, a profit of $183–$667 billion and an invested capital of $400 billion–$1 trillion.
In addition to impact investing, some other terms, such as sustainable investment, conscious capitalism, and ethical investment have also been introduced.
Why is impact investing gaining popularity?
Impact investing provides investors with the ability to generate positive and measurable benefits for enhancing environmental and social outcomes. While an ESG strategy may help companies identify which sector is performing better than their competitors in conserving energy, handling potential risks and reducing costs, impact investing may help fund the commercial rollout of a new technology that supports more effective combat against climate change .
Both strategies are aimed at enhancing environmental sustainability. However, impact investing enables investors to make more concrete and measurable contributions.
The world becomes a better place with impact investing
Investors who are inclined toward impact investing want their capital to make a proactive contribution for the betterment of the world. Therefore, they prefer investing their money into businesses that share the same objectives. Several stakeholders are increasingly recognizing the shortcomings associated with the current financial systems. Impact investing creates revolutionary opportunities to address the gaps of the current financial systems and fund powerful solutions. It is also expected to encourage and promote broader improvements in the financial markets. The 17 Social Development Goals (SDGs) of the United Nations provides investors with clear and strong guidance for impact investing. For example, Goal no. 6 is “clean water and sanitation.” If investors are interested in utilizing their money to ensure that the planet has a better future, they can invest in the shares of those companies that are actively contributing in making water, safer and purer.
One doesn’t need to be ‘wealthy’ in order to create an impact
Although it is true that only the major investors in a business have the power to influence strategic choices and re-orient the business toward profitability, private investors may, however, have an indirect positive impact. They can invest in funds that are being handled by managers who influence the decisions of a company, either through supervisory board discussions or general meetings.
Impact capital can be increased incrementally
Impact investing is primarily beneficial for private investors, as their salary increases over a period. With a savings plan, they can invest a small amount in an impact fund every month. One of its USPs is the benefit that the monthly installment amount can be adjusted anytime. The flexible approach of impact investing gives investors an increased control over their investments, while the capital continues to grow over time.
Capital grows steadily with impact investing
A large number of investors is now interested in the success of an organization in the long term, rather than just a specific financial year. The best part is that impact investing lays the groundwork for consistent growth, and businesses that are already aligning themselves with their sustainability goals will enjoy the benefits of maintaining a competitive advantage in the future. Impact investors are helping create leaders of tomorrow.
Impact investing has become mainstream
According to the 2020 survey by the Global Impact Investing Network (GIIN), the global impact investing market size is $715 billion and is expanding rapidly. Breaking its decade long record, the 2020 impact investor survey represented the highest number of respondents in the last 10 years – 294 global impact investors with a collective $404 billion worth of impact investing assets under management.
In the survey, the respondents stated that an increase in the sophistication of management practices and impact measurement have primarily led to the market’s growth. Among the respondents, 57% of the respondents stated that the unprecedented situations caused due to COVID-19 are unlikely to influence their decision on their capital commitment to impact investments this year. Almost 50% of the respondents asserted that they will meet their expectations in terms of impact performance.
Impact investing has witnessed an incredible growth over the past decade. Despite challenges, the sophistication has increased, and with several investors increasingly turning toward impact investing to ensure their contribution to environmental and social solutions, the sector is expected to gain more traction.
The current state of the impact investing market
Although many investors have been impact investing since many years, a new collaborative effort at an international level has emerged and is accelerating the development of markets that are high-functioning and encourage impact investing. Even though this market is still at a nascent stage, investors are optimistic about its growth and expect greater sophistication and efficiency in the future.
Impact investing will continue to evolve rapidly in the coming decades and is not just a trend. In simple words, individuals across the world are realizing that our future depends on it. A philanthropic approach to charity is no longer the only option for making a difference and impact investing is being viewed as a fundamental driver for positive change.
Diverse types of investors such as large financial institutions, private wealth managers, pension funds, commercial banks, individuals, family offices, foundations, and development finance institutions are becoming increasingly interested in impact investing. To narrow down the funding gap to achieve the SDGs by 2030, there is still a lot of room for improvement in our efforts. It is necessary that we direct our focus on impact investing so that the world does not suffer due to irreversible consequences.
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