What is Impact Investing?
Impact investing, also known as socially responsible investing (SRI), is the practice of investing in companies or organizations with the intention of improving the world through beneficial social or environmental work. This can encompass hot-button domestic issues, like civil rights, or even global issues like climate change and world hunger. Though the concept of impact investing has been around for a long while, in recent years, it has increased in popularity, especially among younger generations.
According to a report by US SIF: The Forum for Sustainable and Responsible Investment at the beginning of 2016, the impact investing market was at $8.7 trillion and growing, accounting for nearly 1 out of every 5 investments under management.
Impact Investing Returns
Investing in positive change sounds good in theory, but being socially and environmentally responsible doesn’t always equate to being profitable. In fact, some believe that it is harder to achieve market or above market returns on impact-style investments. This is a logical conclusion when you consider many of these companies are more driven by their effect on the world than by lining their stakeholder’s pockets.
Luckily for investors—and the entire world—recent data disputes this belief. In a 2016 survey, the Global Impact Investing Network (GIIN) reported that nearly 9 out of every 10 impact investments perform at or above market rates.
Another report, The Impact Investing Benchmark by Cambridge Associates, shows that small impact investment funds considerably outperform similar-sized normal funds.
How is it that these do-gooder companies are bucking traditional wisdom and competing at Wall Street levels? The answer is two-fold:
- Employee Satisfaction – Most impact companies are primarily concerned with making the world a better place for everyone, so it doesn’t come as a surprise that they afford their employees the same respect. Happy employees equals higher performance.
- Market demand – Morgan Stanley’s Institute for Sustainable Investing summarizes the increasing need for impact companies: “In as little as 15 years, global demand for food will increase by 35 percent, with the rise in demand for water at 40 percent and energy at 50 percent. While there is substantial risk tied to those numbers, there is also considerable opportunity for private sector businesses, as well as institutional and individual investors, to benefit from needed improvements in infrastructure to address the resource demand associated with a growing population…Not only are there trillions of dollars in opportunities for businesses, but countless analyses have demonstrated that sustainable investments deliver competitive returns.”
So, these investments have been shown to produce market-rate returns. But, do they actually affect the global change they aim to? The answer to that question is less clear. As you can see in the earlier graph from the GIIN study, 99 percent of investors report that companies reach or exceed their impact expectations. However, impact returns are not as quantifiable as financial returns are. Many companies report qualitative impact results, and there are only a few proven methods for reporting these kinds of returns. In a world that is becoming increasingly data-centric, impact companies need to master measurement and reporting if they are going to keep investors happy.
The Future of Impact Investing
We know impact investing has picked up speed in the past few years, but a true boom in the market may still be coming. As we have previously reported, millennials are about to become the beneficiaries of the largest wealth transfer in history. How millennials choose to utilize their investing power could dictate massive changes in both public and private markets. Fortunately for the impact market, Millennials are more interested than any other generation in investing in socially responsible companies. 52 percent say they either currently have impact investments or are interested in them according to a survey of high-net-worth individuals by the US Trust. Meanwhile, only 37 percent of Gen Xers and 29 percent of Baby Boomers feel the same. Over the next two to three decades, Bank of America Merrill Lynch predicts, millennials could drive about $15 trillion to $20 trillion into impact funds in the US.
Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.
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Disclaimer: WealthForge provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.