By David Newman, COO and co-founder of Delio Wealth
Traditionally, the primary focus for investments has been the financial return. However, recently the focus has shifted to a different type of reward, ones rooted in creating a social or environmental benefit. Impact investing puts investor capital to work directly in organisations, companies or projects whose core mission is to generate financial return alongside a measurable social impact, and it is joining the mainstream.
According to the Global Impact Investing Network[i], the market for impact capital, currently sized at $60 billion, could grow to $2 trillion over the next decade. It is a way of addressing some of society’s most pressing issues without sacrificing on return. And with high-net-worth (HNW) investors being increasingly motivated by emotional and philanthropic factors, it is no wonder that impact investing is seeing such a surge in interest.
Impact investments are made across the globe in a diverse range of sectors and using various financial instruments. Whether the investment is in developing economies, sustainable farming, reforming healthcare and education, micro financing, climate change or one of the many other socially responsible causes, the key is that the investors are able to see a measurable impact in return for the money they’ve put in. Impact investment has attracted a wide variety of investors from fund managers and individual investors to NGOs and religious institutions. The level of involvement in these investments can vary but in general we are seeing a trend towards more investors wanting to be active and hands on with their wealth; impact investing provides a great avenue in which to do this.
As philanthropy and the importance of corporate social responsibly (CSR) is ever apparent in business, impact investing addresses a challenge associated with traditional philanthropy – the reliance on temporary or limited grants and donations. These one-off donations, unlike impact investing, have no continuous capital impact. Impact investing is a much more sustainable and long-term form of philanthropy that provides ongoing capital. It gives entrepreneurial investors the opportunity to use their passion or expertise as well as their money to really get stuck into a project where they can see the tangible impact of their efforts, both socially and financially. It harnesses the efficiency and discipline of private capital markets to address the root causes of social and environmental problems and this prospect excites many of today’s high-net-worth investors.
Social impact funds and direct investing are both options within impact investing. Social impact funds bring the benefit of an experienced manager to guide you through the process. They have direct responsibility for managing and monitoring the opportunity. Funds also allow for cases to be singular or multiple. On the other hand, direct investments allow the individual to have greater control and say to impact the sector they want, in the way they want. It is a more hands-on way of impact investing that allows investors to have a more tangible impact. Preferences will depend on the particular investor and the level of involvement they desire.
Within impact investing, there are a range of expectations with regard to the level of return. Some investors intentionally invest for below-market-rate returns, others pursue competitive market-rate returns. It really is specific to the individual and their strategic goals. However, whatever the goals, impact measurement is central to the practice of impact investing and the growth of this market. Measurement legitimises the practice, mobilises greater capital and increases the transparency and accountability for the impact delivered. Of course, in practice this can be quite complicated and that’s why it is essential that a strong measurement impact framework is in place from the off-set and is adapted over time. There are IRIS standards and GIIRS ratings in place but there is still no agreed minimal data that should be collected by impact funds. It is up to the individual firm, project, asset manager or investor therefore to ensure there is sufficient data collected to be able to measure the real impact of the specific investment.
There are a number of reasons for the rise of impact investing. Social responsibility is becoming more and more important in today’s society. Consumers are increasingly seeking more sustainable products and the costs of renewable energy are plummeting. Therefore, the ability to generate a strong financial return from impact investing is higher. Women and millennials are leading the way for impact investing. According to a United States Treasury survey[ii], millennials are investing in organisations that prioritise the greater good more than any previous generation. They invest in ways that match their lifestyles and beliefs and are happier knowing the money that passes through their hands is being used for something positive. As we are amidst the greatest intergenerational wealth transfer ever known, this group of investors is ever growing and so impact investing is only likely to continue to increase in popularity.
Interestingly, while the demand has grown to be strong for investments with social impact, it is already outstripping supply. Although the number of potential investment opportunities has increased in recent years, there is a shortage of high-quality investment opportunities with track records in this field and a lack of appropriate capital across the risk/return spectrum. Technology could play a role in solving this problem. Technology such as the use of online platforms can increase access to opportunities by overcoming geographic and jurisdictional boundaries. It can improve transparency and track record information which will then naturally progress over time. Ensuring that there is a high level of reporting and monitoring is essential. An improvement in pre- and post-investment support is also necessary to ensure that projects are investment ready. Overcoming this challenge will help boost the continued growth of impact investing.
It is likely that demand for impact investment opportunities will continue to rise and, looking ahead, it’s important that there is a development of strong opportunities across the different impact themes. We need greater transparency and metrics so we can understand the impact these investments are actually having, this will encourage further investment in these projects. Insightful reporting is key. Investors should also not underestimate the importance of finding a wealth manager or advisor who understands the impact field. Impact investing is very specific to the objectives and preferences of the individual investor and can be fairly complex so it is important that the managers and funds fit the specific financial impact goals. There has been great progress in impact investing and with this comes the potential to make a real positive change in the world by addressing some of the most pressing social and environmental issues.
[ii]Forbes. Forbes Magazine, n.d. Web. 27 Apr. 2017.