Is impact investing for you?
Impact investing is an ‘investment into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.’ It is also known as sustainable investing or socially responsible investing. Is it for you?
The Global Impact Investing Network (GIIN) points to three core characteristics of impact investing:
- Intentionality: an investor intends to have a positive social or environmental impact through investments
- A range of asset classes: impact investments can be made in both emerging and developed markets across different asset classes
- Impact measurement: a hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments
Investment management giant BlackRock has seen a huge increase in the adoption of impact investing across all client types in Europe, with different drivers for institutional investors and retail clients.
For many retail clients, impact investing is about combining their potential return on investment with a positive impact for the world. For example, investing in green bonds. For institutional investors, impact investing is more about regulation and risk management.
One of the factors that has triggered the increased interest in impact investment is better quality of metrics used to assess portfolios in terms of environmental, social and governance (ESG) issues or carbon footprint. ESG rating providers have managed to establish strong links between ESG issues that businesses may face and potential financial or other risky outcomes.
For example, the importance of managing waste and toxic emissions for a pharmaceutical company is not just about respecting the environment. If such a company has bad environmental practices, it might be involved in pollution scandals and then lawsuits, which could result in having to pay a fine, subsequently impacting its performance.
If a textile company doesn’t treat its labour force fairly, it might face labour strikes, which would impact its bottom line.
So ESG ratings aim to reflect how companies are exposed to, and manage, certain risks that may impact their cash flows or bottom lines.
As well as better metrics, better performance or rate of return has not, surprisingly, led to increased interest in impact investments. In 2016, annual investor survey by the GIIN, approximately 90% of investors surveyed had financial returns that satisfied or exceeded their expectations.