What is Impact Investing?

Impact investing is an investment strategy that aims to generate financial returns while having a positive environmental impact alongside an influence on social factors. This investment model can be considered philanthropy work, as investors aim to reduce the negative effects caused by business activity on the environment.

Apart from financial goals, such as gaining higher returns and ensuring a positive ROI, impact investors also have environmental or social goals they wish to achieve.

Examples of impact investing may include investing in sustainable industries or companies that are combating global issues such as poverty, food shortage, and climate change. It could also be investing in green technology to reduce the environmental harms of machinery or non-profits that give back to the community.

Rise of the Global Impact Investment Market

Impact investing and related strategies that support sustainable investing have started to grow in recent years. This can be attributed to the increasing awareness of environmental challenges such as climate change, global warming, and pollution.

Companies have also noted the benefits of following and promoting sustainable practices. Impact investing primarily appeals to people who wish to give back to the community, so companies committed to corporate social responsibility tend to see a more considerable inflow of impact investment.

According to a study conducted by the Global Impact Investing Network, 88% of impact investors report that their investments met or exceeded their expectations. GIIN also estimates the impact investing market to have a value of $1.16 trillion in 2022.

To effectively gauge the market growth of this particular investment strategy, we can also look at the U.S., where the amount of sustainable funds has been consistently growing. As reported by Morningstar, assets in sustainable funds managed to cross the $350 billion mark in 2021 - an increase of 35% compared to 2020.

These are some key highlights to consider when assessing the growth of this field of investment.

What’s Driving the Growth in Impact Investing?

Many factors can be responsible for sustainable and impact investing growth. With 85% of asset managers and 83% of asset owners planning to implement sustainable investing, it would be beneficial to figure out the intention behind such motives and what exactly contributes to the growth of impact investing.

Here are some of the many factors we can confidently identify as being part of why impact investing has been growing in recent years:

Social Justice Movements

A 2021 report by Morgan Stanley suggests that 50% of individual investors, including 73% of millennial investors, showed an increased interest in impact investing in response to social justice movements. To combat social issues, investors plan to make changes in their investment portfolio strategy within the next 12 months.

The COVID-19 Pandemic

After the spread of the coronavirus, many investors, especially millennial investors, started to focus more on supporting small businesses and public health amidst the pandemic. Morgan Stanley also states, "2020’s turbulence significantly impacted sustainable investing.”

During this time, 99% of millennial investors showed an interest in impact investing, with 61% prioritizing themes related to Covid-19.

Growing Environmental Concerns

Typically, we’ve seen that as business activity increases, environmental harm follows. Due to growing environmental concerns, investors look for ways to invest in a socially responsible way that could reduce environmental harm and encourage sustainable ways of production.

This has prompted impact investors to invest in renewable energy and green technology and help combat pollution and plastic waste to promote a circular economy.

Climate Change Awareness

Investors continue to emphasize the growing concerns of climate change. According to the report, 74% of people were interested in investing in climate-themed businesses to tackle challenges with climate change. From the interested investors, 60% of people are also focused on investments that also focus on solutions to reduce greenhouse gasses.

Higher Priority of ESG Factors

Due to behavioral and mindset shifts in recent years, more millennials, Gen X, and Gen Z investors have started to look for alternative investments to stocks and bonds.

According to the Bank of America, 80% of young investors are looking for alternative investment opportunities that could generate financial returns and bring about positive social and environmental change. This demand is still largely unmet due to a lack of familiarization and adoption of impact investment strategies.

“The demand for investments, especially among Gen X and Millennials, that align financial resources with personal interests and values simply isn’t being met in today’s market,” - Josh Hile, CEO and co-founder of Citizen Mint

Despite the lack of awareness, many investors have started to encourage businesses to focus on ESG (Environmental, Social, and Governance) factors to achieve risk-adjusted market returns.

Top Fields That Dominate the Impact Investing Space

Investing in any business or project promoting positive social and environmental change can be considered impact investing. However, there are some areas of interest that impact investors seem more interested in as compared to others.

Public Health

Ever since the COVID-19 pandemic hit, many people started to show an increased interest in public healthcare. Impact investors would typically invest in healthcare providers aiming to enhance the quality of life and make healthcare more accessible.

Investing in the healthcare sector also tends to generate higher financial returns but is typically only worth it in the long run, as healthcare organizations can take around 5-10 years to produce meaningful results from their investments.

Plastic Waste Reduction

According to the 2021 Morgan Stanley report, 79% of people were interested in prioritizing the reduction of plastic waste. 78% of people were also interested in the idea of a circular economy, where waste is recycled and reused to manufacture products.

Out of all the respondents, 40% of people also favored using recycled waste to minimize the negative impact on the environment.

Climate Change

Second to public health, climate change seems to be the most highly-sought after industry to invest in for impact investors. 97% of respondents in the Morgan Stanley report said that they aim to invest in solutions that help alleviate greenhouse gas emissions and adapt to changing climatic conditions.

Inclusivity and Equity

Millennials and Gen Z have been credited with raising awareness of social issues regarding the workplace in recent years. This can range from discrimination to inflexible working arrangements.

Through an impact investing strategy, people wish to reduce inequality of women and people of color that may be victims of discrimination in workplaces. This has been evident due to increased demand from shareholders requiring companies to show diverse demographics, including data on hiring and retention rates of specific employee segments like women and people of color.

What’s the Difference Between Impact Investing and Socially Responsible Investing?

Impact investing, as we’ve discussed above, is an investment strategy aimed at making a positive impact on environmental and/or societal factors.

Socially responsible investing, or SRI, on the other hand, is an investment strategy that focuses on the avoidance of harm. For example, a socially responsible investor would choose not to invest in a company that manufactures products or uses methods of production that harm the environment.

This could include companies that manufacture and distribute cigarettes, a business that produces a lot of waste, or industries that emit vast amounts of greenhouse gasses, etc.

Importance of Impact Investing

Impact investing has excellent potential, and people implementing this investment strategy manage to generate high financial returns, achieve their corporate social responsibility goals, and diversify their investment portfolio.

Here are some reasons why some investors emphasize an impact investing strategy.

Generates High Financial Returns

One of the main reasons people report not indulging in impact investing is that they fear lesser financial returns on their investment. This is understandable as most investors believe that in order to positively impact the community, they would have to compromise on their financial goals.

However, the 2020 report by Global Impact Investing Network begs to differ. 88% of the investors from that report state that impact investments met or exceeded their expectations and improved their financial performance. This means that impact investing can be a great way to diversify your portfolio and lessen your dependence on traditional investments.

Encourages CSR

With the growing trend of impact investing, investors can hold companies accountable for their actions. It’s no secret that business activity often results in a lot of damage and harm to the environment, so companies have started to implement corporate social responsibility (CSR).

Impact investing helps companies achieve their CSR goals by using that investment to build sustainable resources, reduce waste, and give back to the community.

Develop Sustainable Business Practices

As impact investing continues to grow, industries responsible for tackling climate change, developing renewable energy, and eliminating social/global issues also grow.

That is because impact investors invest in companies that are responsible for developing sustainable best practices. This leads to a win-win situation where everyone benefits from the impact investments that aim to improve business activity.

Improves ESG Factors

ESG factors refer to environmental, social, and governance factors. Through impact investing, these factors are positively influenced as impact investors highly prioritize them. This can lead to an overall improvement in societal and environmental challenges such as climate change or inequalities.

Conclusion

Impact investing is a great way to diversify your portfolio, generate financial returns, and give back to the community by achieving your CSR objectives. This investment strategy has been gaining recent popularity amongst millennials and has been prevalent in helping combat climate change, wastage, and inequalities.

The trajectory of impact investing is promising, and many young investors hope more and more people grow aware of impact investing and how it can play a role in helping navigate through the environmental and social challenges we face today.