Impact Investing — Influencing Organizations with our Investments
What is Impact Investing?
When it comes to investing, ESG, Impact, or Socially Responsible investing balances an interest in financial returns with an interest in societal or environmental returns within a portfolio. Today, roughly 56% of investors in the UK are interested in impact investing according to a survey of 1,800 individuals by the National Advisory Board on Impact Investing, 8 in 10 millennial investors express interest in impact investing, while half participate in it according to Morgan Stanley.
Investing sustainably is now big business. Funds with an eye on both sustainability and financial returns have outperformed conventional stocks. This is just as well since a Schroders client survey revealed 67% of UK investors said sustainable investing was important to them and were willing to hold sustainable investments for two years longer than the average investor.
This is probably why so much money is now flowing into the space: In the three months prior to September 2020, investors pumped £62bn into sustainable funds, reaching a total investment of £930bn of assets by Q3 2020 according to Morningstar. And it won’t stop there. Bank of America predicts that by 2030, there will be over $20trn of assets in sustainable funds, a figure equal to the entire size of the current S&P 500.
Such investments are crucial. The UN believes we need to invest $2.4trn a year to meet globally agreed development goals, but that the return for this investment is likely to be a $26trn opportunity. Impact investing doesn’t always mean sacrificing returns — far from it!
Most impact investors (67%) expect market rate returns, according to the 2020 Impact Investor Survey by the Global Impact Investing Network (GIIN). The majority of respondents reported that their investments either outperformed their expectations (20%) or met expectations (68%) while the rest (12%) felt their investments underperformed compared to expectations.
These perceptions are more or less in line with a comprehensive review of 2200 empirical studies published in the Journal of Sustainable Finance and Investing in 2015. It states that 90% of the research shows a positive link between environmental, social and governance values (ESG) and corporate financial performance (CFP).
Though far less easy to track and monitor than financial returns, impact related returns are traced in the form of KPIs linked to social and environmental benefits. For areas in which organizations seek to make impacts, look no further than the United Nations Sustainable Development Goals..
For-profit entities, having financial growth as their primary goal, are now having their first taste of reporting how their finances benefit society-or at least don’t harm it, per the TCFD -whereas nonprofits have done so for years. This lack of measurement has often granted an exception to for-profits, allowing them to operate without their “conscience” being examined under the spotlight of public markets.
However, consumers and investors are increasingly challenging the concept that financial performance can be delivered in absence of societal or environmental impact. Using both their individual purchasing decisions and their investment portfolios, individuals and professional investors alike can promote their non-financial values and hold businesses to account.
Impact Strategies for Investors
Using your investments and purchasing decisions to create a societal impact has generated a new set of questions:
- How can we most influence organizations to do good in the world with our investments?
- How do we hold organizations accountable to their promises?
- How do we measure the societal impacts of organizations?
Most of these questions fall under the umbrella of strategy. Impact investors seek to understand the best strategy to make change in the world through financial influence.
For some, the answer is simple: divest from organizations that don’t make an impact and reinvest in ones that do. This straightforward approach essentially involves extreme avoidance by boycotting companies. Successful divestment, or at least the credible threat of it, can be extremely disruptive. Divestment also assumes you have alternatives worthy of reinvestment within an industry. For these reasons, impact investors are increasingly taking more nuanced approaches towards making an impact.
2. Shareholder Engagement
Rather than solely relying on financial influence, shareholders increasingly band together to persuade the leadership of an organization to change from within. They use their vote to make an organizational impact internally.
3. ESG investing (Environmental, Social and Governance)
- Negative screening: Excluding bad companies like arms dealers, the pornography industry, irresponsible natural resources companies (such as some miners or water companies) and firms with poor governance or labour practices (like fast fashion firms).
- Positive screening: Seeking to invest in companies that score positively on indicators such as societal and environmental impact as well as internal governance issues like labour practices, diversity and whistleblowing. FAANGS stocks are an example of stocks often held in ESG portfolios as they are all either carbon neutral, or close to it.
4. Socially responsible investing
Seeking to maixmise profit by investing in for-profit businesses that are socially responsible in their operations and products. Often called double or triple bottom line investing…focusing on profit and purpose/planet/people.
5. Impact investing
Focusing more on impact than financial considerations, but still seeking a profit. Businesses attracting impact investors may in fact be highly profitable, but Impact investors are seeking to maximise impact returns over financial returns
Defining your Impact Investing Strategy
According to Francois Botha in , investors fall on a spectrum of motivations. Between sole interests in either financial returns or impact, you’ll find most ESG investors.
However, ESG investing can still include organizations that make impacts in some areas but not in others, or balance their negative impacts by compensating with external activities, An example of this would be an oil company offsetting their carbon emissions with carbon offsetting.
Impact investors choose to invest in businesses with detailed evidence of impact and conduct that reflects true sustainability in all aspects of business. Impact investors research all aspects of businesses: supply chain, operations, products or services, stakeholder inclusion and community impact.
Clearly acknowledging your own aims as an investor can help you choose the most appropriate set of strategies.
Originally published at https://www.attis.earth on November 13, 2020.