Impact Strategy Is Vital to the Future of Investment
Financial investment opportunities with environmental or social benefits
Recently, there has been a collective realization that in addition to government aid and philanthropy, private enterprises should contribute to solving social and environmental issues. With that, there is a growing number of investors who want to be able to ‘do good while doing well’, these are known as impact investors.
An investment only has impact if it increases the quality or quantity of an enterprise’s social outcome in a manner beyond that which would have occurred otherwise. Impact investors are socially motivated, and, like philanthropists, intend to achieve social goals. A recent study shows that most of the impact investment market involves the production of US$4 billion market returns.
Recent Trends Shaping the Impact Investment Industry
Impact investment is a fast-growing industry offering a way to reap financial, social, and environmental benefit. It is part of the important movement towards financial systems aiming to deliver financial sustainability and measurable improvements towards the environmental goals of society. In order to expand and attract a range of investors, the standards of measuring impact need to be re-evaluated.
As more and more new players are joining the game, the size of the impact investment market more than tripled between 2017 and 2019, to $715 billion, yet this is still only a fraction of the total assets under management by 2019, estimated at $104.4 trillion. Of the investors involved, 65% were asset managers, 14% philanthropic foundations, 2% pension funds and 1% insurance industry players.
Metrics defining impact currently focus on looking back rather than forwards, but the past doesn’t always necessarily reflect future trajectories. New impact metrics and standards such as forecasting finances could be increasingly incorporated into company guidance moving forward. This is especially important for impact startups as they move up through each stage and round of funding before becoming publicly listed.
The Main Elements of Impact Investing
This type of investing provides a platform for unleashing the power of capital for the greater good, as they are made with the intention of generating a financial return together with positive measurable, social and environmental impact. Investments can be made in both developed and emerging markets, in sectors such as renewable energy, sustainable agriculture, accessibility to basic services and more.
There are a few key elements that define impact investing, starting with intentionality. The investor’s intention to have positive social or environmental impacts is an essential part of impact investing. Impact investments are also expected to generate financial returns and target a range of return expectations from concessionary to risk-adjusted market rate. Finally, the commitment of the investor to measure and report the impact i.e., the social and environmental performance and progress, is vital to impact investing, and ensures transparency and accountability.
Range of Benefits
In theory, making small, consistent investments with the potential to make big impacts can help reduce the risk for financiers while earning an acceptable return. It is also a great way to improve social and environmental returns since the money is being put into areas that positively impact our society and the environment.
The finances can help create sustainable businesses, as well as reduce poverty and inequality by investing in the relevant associated companies with strong records of causing positive improvement in these areas.
Companies that aim to improve the quality of life or expand economic opportunities for people in need can help create jobs, promote economic growth, and expand access to education and healthcare. Other impact investment opportunities could also benefit natural resource preservation, improve public finance, and help towards reducing climate change.
Guidelines for Impact Investing
Whether impact investors provide financial backing and innovative impact management, or support with entrepreneurial leadership, the important thing is a committed to developing and delivering sustainable long-term solutions. Each new opportunity should be evaluated independently to measure the breadth and depth of its social, environmental, and economic benefits.
Maintaining the sustainable use of scarce natural resources requires large-scale investments with an environmental focus and can create a thriving economy. Focusing on environmental infrastructure projects such as water management and renewable energy can provide sustainable long-term solutions.
Meanwhile, recognizing that no single entity can solve all of the current challenges we face today can nurture a collaborative approach. Successfully structured partnerships will ensure the delivery of innovative, comprehensive and sustainable solutions.
Impact Investing is Here to Stay
The rise of impact investing serves some important purposes. It offers investable solutions addressing today’s challenges, as well as changing the way we look at investing. As this type of investment grows, it begins to become normalized, allowing a systematic change to take place.
Impact investing has the potential to change our future, as our investment patterns define the world we want to live in. It’s not just down to government aids and big philanthropists. By putting our money in social and environmental areas, we have the ability to create a better future for all.