Impact Investing
August 24, 2021
What is “Impact Investing”?
Impact Investing is an investment approach that focuses not only on generating financial returns, but also make a positive impact on society and/or the environment.
This strategy can be employed by investors using various asset classes and could also be designed to target a specific outcome, for example, a mutual fund that supports companies to move towards more sustainable products and services. This type of investing is particularly popular with younger generations, who believe that impact investing and making good for society are closely aligned with their core values.
Key Learning Points
- Impact investing is an investment philosophy that seeks to deliver both financial returns and positive social and/or environmental impact.
- Investors can employ this strategy through investing in various asset classes, for example, equities or bonds, by assessing the company’s commitment to making good for the society or the environment.
- Environmental, Social, and Governance (ESG) and Socially Responsible Investing (SRI) are two of the most popular approaches to impact investing.
- Historically, it was considered that avoiding companies limit the investment universe, which on the other hand negatively impacts the portfolio’s return profile. However, more recent studies have demonstrated that impact strategies have the potential to outperform over the long term.
- A growing number of investment professionals integrate ESG into their investment process and consider ESG as a material risk.
The Rising Popularity of Impact Investing
Despite that impact investing has started to gain more popularity over the past decade, impact strategies have been existing for a long time. As the millennials are the next-in-line generation to inherit wealth and decide how to allocate it, it turned out that they have more interest in aligning their investments with their core values and require not just financial gain, but making a positive impact on society and the environment.
Impact investing includes a wide variety of options, both on an asset class, geographical, and sector level. By investing in themes such as renewable energy or sustainable production, investors target issues around climate change and unethical production practices, for example, forced or child labor.
With the rise of impact investing, more companies have decided to actively pursue sustainable and ethical practices, not just to appeal to potential investors, but to realize that addressing and actively working on those issues would make them more efficient and potentially profitable over the long term.
The Case for Impact Investing
The efficiency of impact investing has been long debated. The main argument against is that shrinking the investment universe could disadvantage investors should non-sustainable businesses perform well. However, the global pandemic was a good test and many companies that operate in traditionally non-sustainable sectors have underperformed, for example, oil and gas, mining, and transportation. On the other hand, businesses that usually target social improvement or have a low carbon footprint have outperformed, for example, healthcare, technology, and communication services.
