Impact Investing
What You Should Know
Over the recent years, we have come together on a global level with the desire and determination to successfully attain the United Nations’ Sustainable Development Goals — to eradicate poverty, achieve equality, improve the quality of life, and protect our environment. Many have taken action to help reach these goals through impact investing. The question is, “Where can we make the most impact and how?”
Over the recent years, we have come together on a global level with the desire and determination to successfully attain the United Nations’ Sustainable Development Goals. In other words, to eradicate poverty, achieve equality, improve the quality of life, and protect our environment. Many have taken action to help reach these goals. The question is, “Where can we make the most impact and how?”
In “The State of Impact Investing”, we discussed how “capital is king.”
“The evolution of impact investing over the last two decades has proven that capital is king when it comes to having real impact. In order to truly solve some of the world’s greatest issues in energy, agriculture, food, healthcare, and general social wellness, we have to put serious economic focus into these areas.”
This can be accomplished through impact investing.
Invested Industries
What is Impact Investing?
Impact investing focuses specifically on investments that make a positive social and environmental impact on a local, national or global scale. Transformation, LLC, defines impact investing as private investment in the markets of energy, water, agriculture and healthcare with the directed impact of improving the system efficiency in one or more of those markets.
It helps shape the future of sustainable, profitable programs.
The impact isn’t just feel-good feelings, however. Impact investments are measurable investments that not only affect society and environment, but also provide a competitive financial profit to the investor.
Who Utilizes Impact Investing?
Impact investment opportunities pull individual and institutional investors. Among those who’ve created impact investing platforms are Blackstone, Morgan Stanley, TPG, Hamilton Lane and KKR, who raised $1.3 billion for their impact investing fund led by public pensions, family offices and wealthy individuals.
But large institutions aren’t the only investors that can be found in the impact investment group. The Global Impact Investing Network (GIIN) gives the following list of types of impact investors:
- Fund Managers
- Development finance institutions
- Diversified financial institutions/banks
- Private foundations
- Pension funds and insurance companies
- Family Offices
- Individual investors
- NGOs
- Religious institutions
Types of Impact Investments
Of course, a wide range of investors means an equally large range of investing types. All have the united interest of seeing a positive impact, and all have performance expectations, but the areas of impact vary.
Common types of impact investments include:
- Green bonds
- Socially responsible ETFs
- Private sector impact investments
However, what falls under “impact investing” is liquid, as there’s no regulation on the definition. Unlimited by size or type of investment vehicle, all the below can potentially be impact investments.
SEED
Bank debt
Micro-lending
Crowdfunding
START-UP
Venture capital
Angel investing
GROWTH
Private equity
Private debt
Real assets
EXPANSION
Public equity
Public debt
Social stock exchanges
How Impact Investing is Measured
The biggest challenge in Impact Investing is the lack of consistency in how “impact” is measured. Diane-Laure Arjaliès, assistant professor at the Ivey Business School writes in her article “Why Impact Investing Matters: A Primer:”
“Measuring impact is art and science…Investors and managers alike increasingly want to assess businesses’ impact on society. But measuring a firm’s wider societal impacts is not easy. Accounting standards for measuring impact do not exist, and the measures in use are still evolving…”
As Arjaliès explains, there are so many types of impact investments, that the basis for measurement is inherently inconsistent. For example, a Forest Bond may be measured based on its biodiversity protection, whereas a real estate development may look at the number of parks in a neighborhood, energy use, and access to employment.
The Challenges of Impact Investing
According to Phenix Capital’s Impact Investing Asset Owner Report [PDF], there are several cited challenges in the past. Some of these issues are as listed:
- Lack of opportunity/size of market (there is a limit in opportunities both in market and finances making it difficult for large investors to come in)
- Execution: sourcing and evaluation (sourcing funds that not only have an impact focus, but also have adequate risk and return characteristics; sourcing investment opportunities that relate to specific areas; carrying out due diligence for all of the above)
- Lack of education, and/or disagreements between stakeholders (differing views of stakeholders, particularly between investors of different generations; the idea of impact and profitability as a simultaneous goal is split among investors)
- Skepticism and other gray areas of what can be considered “impact investing” (green washing has caused concern as well as lack of consistent use of standards to measure impact, and the concern that impact investing is still very new)
The good news is: all of this is changing. Not only are there services that are improving the status of impact investments, but there has been and continues to be a significant growth in the demand for impact investing.
Challenge Solving Technology
AI is transforming sustainability. With the rise of applicable innovative technologies in the areas of energy, water, and agriculture, there are new ways of making impactful projects profitable and sustainable for the long term.
See: How blockchain has transformed the lives of Ecuadorean cocoa farmers
Agriculture
Next Gen Farming
Easy access to crop analysis
Smart irrigation systems
Soil & light sensors
Water
Better infrastructure
Digital water systems
Water conservation
Contamination prevention
Energy
Power outage predictions
Microgrid efficiencies
Easier energy exploration
What Is New/Trending In Impact Investing For 2020?
BlackRock, an American global investment management corporation and the world’s largest asset manager, has recently taken part in an Climate Action 100+. This investor initiative ensures the world’s largest corporate greenhouse gas emitters take essential steps toward climate change.
Read: World’s largest asset manager BlackRock joins $41 trillion climate-change investing pact
“Trillium Asset Management, with more than $2.8 billion in assets, agreed to be acquired by Australian financial services firm Perpetual. It’s the latest transaction as sustainable investing becomes more popular.”
Read: The Latest Trend in Sustainable Investing? Mergers Among Managers
Climate becomes a priority in ESG (Environmental, Social, and Governance). Central banks are aiming to voice out and illuminate the risks in climate this year. Wall Street will create more pieces that tackle climate change and global warming to open doors for profit and sustainable programs for the year 2020.
The Rising Demand for Impact Investing
Bonnie Chiu, a Senior Contributor at Forbes Author and Forbes 30 under 30 Social Entrepreneur discusses how, in this present generation, there is a more conscious consumption amongst consumers and how there is an existing pressure for leading companies to accommodate ethical and positive social impacts. She further adds how Millennials, a more globalized generation, are “the new investors” who are more open to international private and public markets, while on the constant lookout for green-washing and impact-washing.
With this said, the year 2020 is looking to be the year where impact investing truly goes mainstream for the following reasons:
A new generation of investors have arrived, and they are keen to create positive social and environmental impacts through sustainable investments with an eye that sees beyond borders, taking on global markets.
A number of large investors and corporations are placing importance to the trend of impact investing and creating strategies that cater to contributing positive action towards Sustainable Development Goals.
The technology that we need in order to address our global crises is within our grasp.
