Ever since the triple bottom line has been introduced, big corporations have been under a microscope by governments and other organisations. Do corporations take environmental damage, social effects and other soft factors into account? This bigger awareness of the importance of other factors than just plain profits has shifted the attention of some investors. Not anymore, do only philanthropists or government funds consider other effects than financial returns. More and more private investors, pension funds and mutual funds have shifted their focus to these areas. This doesn’t mean that everybody provides micro finances in Africa or invests in zero-emission corporations. The extent to which these investors aim to have impact varies from shunning tobacco or oil stocks to directly investing in social enterprises, striving to better the world.
The view that this world of impact investing is just for the ‘happy few’ and impact comes before profits is outdated and a misconception. Over the last decade, the market for impact investing has grown to a multibillion dollar market. This article explores the comprehensive field of impact investing and shows that doing good doesn’t necessarily mean losing money.
What is impact investing?
Impact investing comes in different flavours and tailors to everybody’s wishes. Investments strategies range from buying securities that bring about environmental change (such as waste reduction), to enterprises that provide clean water in developing countries. The common denominator in the field is the creation of both financial and social returns.
Whereas many people used to think of charities when it comes to social value creation, nowadays impact investing is becoming more common. Darren Walker, the head of the mighty $12 bn. Ford Foundation, told the Financial Times that: “It’s not just 5 per cent of your money you give away that matters. What you do with the other 95 per cent is almost more important.” This trend is also visible in the spending patterns of big corporations. Earlier in 2017, UBS decided to invest at least $5bn of its clients’ money to impact investing over the next five years and big organisations like the Rockefeller Foundation are experimenting as well. The Global Impact Investing Network (GIIN) estimates that the market for impact investing is already a $114bn sector. JPMorgan suggests the sector could surpass $1tn by 2020.
Unlike previously, when the field of impact investing was the domain of big corporations and wealthy philanthropists, impact investing is now accessible for everybody with small amounts of money to spare. Especially in the advanced world, impact investing has become tremendously more popular among individual investors, over the last decade. The Western world has experienced very low interest rates since the 2008 global financial crisis, making these investments particularly interesting.
Is impact investing profitable?
For a long time, investors have argued that impact investing was not their cup of tea because the financial returns were simply not matching market rates. They felt that for the degree of risk they had to bear, returns were not adequate. For a part of the market, this argument holds true. Certain investments in social enterprises, aiming to provide help in underdeveloped areas, bear a great deal of risk without compensating for this. However, this is only a niche in the spectrum of impact investing.
Although it is extremely complex to assess, consultancies such as McKinsey and the GIIN have estimated that investors think they achieve annual returns of 5 to 15 percent, suggesting that impact investing does pay off. These numbers may even be higher for ‘normal’ investors, as the estimates include returns of investors deliberately aiming for below market rate returns in order to maximise social value.
How to have impact?
As mentioned before, impact investing comes in different flavours. For investors without the knowledge or time to do in depth analysis on various potential investments, there exists a wide variety of exchange traded funds (ETF’s). BlackRock (iShares) and Guggenheim Investments offer a broad pool of ETF’s, matching very different investment styles, from green energy to social real estate and more. For investors preferring an active approach, there are more and more investment management corporations that offer mutual funds in the impact investing sector and one can always search individually for impactful investments. More direct exposure to impactful companies and organisations can be obtained by directly investing in these impactful entities. For publicly traded companies this entails buying regular securities, such as stocks and bonds. There are more options, though. The World Bank offers triple-A rated bonds, with exposure to various fields and social enterprises often offer different forms of equity and debt, as well. These direct investments in small enterprises bear fairly big amounts of risk, however.
After investing in a particular instrument, it remains difficult to measure the amount of impact of the investment. As the Financial Times argues, many impact investors acknowledge this. Opposed to baby-boomers, three-quarters of millennials strongly take social goals into account, when they invest. This pushes some pressure on the search for metrics and reporting systems on the impact of investments. “After all, US millennials are slated to inherit around $12tn of assets in the next decade or two. Either way, this is making the philanthropy game far more interesting – and unpredictable – than ever before. Think of that, if you slip a coin into a charity tin over the holiday.
Written by Joppe de Bruin