Since the socially aware era of the 1960s the concept of impact investing has been steadily gaining momentum. Now, a growing body of evidence indicates impact investing has moved well beyond casual philanthropy, hitting the mainstream and offering a very real financial return.
If you’ve ever considered putting your capital to better social use, here’s how impact investing is evolving and how you can be part of the shift…
What is impact investing?
At its simplest, impact investing is a financial strategy where people invest in projects, products, or services that offer benefits to society.
From sustainable food production to educational services and environmental causes, these investments seek to improve the world in which we live.
And, according to the 2016 Australian Impact Benchmarking Report: “Impact investing is capable of driving significant momentum and advances in how we tackle issues facing society”. It can drive more investment into resolution of those issues rather than treating their symptoms.
“IMPACT INVESTMENT IS CONTRIBUTING POSITIVE EFFECTS INTERNATIONALLY, CATALYSING NEW MARKETS AND ENCOURAGING ENTREPRENEURSHIP AND INNOVATION AIMED AT SOLVING ENTRENCHED ISSUES AND CREATING SUSTAINABLE SOLUTIONS.”
The numbers have it
Despite the obvious societal benefits of investment that acts for the greater good, until recently there remained a misapprehension that “good” equates to additional “risk”. New research and a rising interest indicates that’s not the case.
In a recent article in The Conversation, authors Erin Castellas and Jarrod Ormiston noted the financial returns from “impact investing” are on par with mainstream investments.
“Australian debt impact investments have returned 7.9% over a five-year period, compared to expectations of a 7% market return. This disproves the idea that there is a necessary trade-off between impact and financial returns.”
Meanwhile, the 2016 Impact Benchmarking report also indicates impact investments are meeting or exceeding expected financial returns.
“Since inception, financial returns for assets in the Data-set across all asset classes are positive and reported to be tracking within expected return ranges; actual return ranges include: 5.4%–17% for debt; 3.25%–12% for fixed income; and 0–12.6% for real assets.”
On a global level it is a similar scenario, with the Global Impact Investment Network recently concluding: “Impact investors seeking market rate returns can achieve them. Across various strategies and asset classes, top quartile funds seeking market-rate returns perform at similar levels to peers in conventional markets. In many cases, median performance is also quite similar.”
A rising trend
A shift in thinking and this proven financial return sees an industry experiencing a rapid rise.
Australia’s impact investment market grew from just one deal in 2010, to 92 deals and over A$1.2 billion invested by the end of 2015.
Globally, the increase was even more astounding. The latest Responsible Investment Association Australasia (RIAA) Benchmark Report indicates ethical fund assets grew 62 per cent in 2015 to $52 billion, and the sector has doubled in two years as responsible investing redefines the investment landscape.
Meanwhile, they further estimate there is more than $US21.4 trillion ($2.96 trillion) invested in ethical strategies around the globe.
What’s driving the change?
According to various reports, this socially aware investing is driven by a series of factors, including:
· A shift in investor attitudes
· Greater awareness
· Greater product and investment offerings
And contrary to popular belief, it’s not one demographic pushing the agenda.
“It's important to state at the outset that ethical investment is no longer a niche. It is big business.” The Australian Financial Review noted this year.
“Millennials, industry super funds and a general shifting of investor attitudes towards social and environmental issues are among the big drivers of fund flows.”
Meanwhile Forbes cites a link between general consumer behaviour and the rise of impact investing.
“A recent global online study conducted by Nielsen found that millennials continue to be most willing to pay extra for sustainable offerings - almost three out of four respondents in the latest findings, up from approximately half in 2014.
“Interestingly, the baby boomer generation also value sustainability, as the same Nielsen survey found that 51% of baby boomers surveyed are also willing to pay extra-an increase of seven percentage points since last year.
“Though not necessarily referring to sustainable investment strategies, the results of this study seem to support a growing, global and cross-generational interest in companies that promote sustainability.”
How you can play a role
The true art of impact investing is not just throwing cash at a cause that appears to do good or a traditional-style portfolio that appears to do less harm. Its ultimate outcome lies in finding a strategy that resonates with your goals as an individual or organisation.
This can be achieved by shifting and aligning current portfolios or establishing new interests in sustainable or environmental investments.
At our partner company, Impact Investment Fund (IIF), they work with our investors to determine the most appropriate investment strategy for their short, mid and long-term objectives. They add further value by connecting their investment capital to a range of funds and investments that align to their objectives, values and wealth creation targets.
The IIF advisory team then manages the implementation of the investment strategy and future reporting, monitoring, administration, compliance and governance.
Impact investing is here, it’s mainstream and its rewards encompass both financial and real societal change. You can register your interest in impact investing here, or contact us directly for further advice.
About the author:
Geoff Gourley is a recognised global social entrepreneur and impact investor, founder and chairman of Impact Investment Fund and One10. In his spare time he enjoys writing about impact, social enterprise and innovation. @geoffgourley or connect on LinkedIn