‘What matters more – your wallet or your planet?’ Such is the quandary facing the everyday consumer, whether we’re talking about organic grocery shopping, fast fashion purchases, or green energy tariffs.
But the link between the two is perhaps no more tangible than when we talk about investing. The emergence of ‘impact investment’ – defined by the Global Impact Investing Network (GIIN) as investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return" – has forced consumers to decide whether they prioritise higher rates of return or doing good when it comes to putting away their money.
Realising the opportunity
At current, the impact investment sector is sized at around $500 billion. A not insignificant sum, but only a fraction of the $26 trillion that the International Finance Corporation estimates investors’ appetite to be in a new report published in April this year.
And there is more interest being expressed in growing the appeal of impact investing on a governmental level as well, as evidenced in the UK with the recent launch of the Impact Investing Institute. Government-backed, and with former Financial Times business editor Sarah Gordon in place as the organisation’s first CEO, the Institute’s launch signals the UK’s intent to mark itself out as a global champion in the space.
Ultimately, regulatory restrictions and government mandates will most likely ensure that at some stage, impact investing will become the enforced norm rather than purely the morally righteous option. But before we reach that point, what steps need to be taken to lay the groundwork for long-term success?
One of the key issues facing those working in the space is the lack of standardisation around what actually constitutes an ‘impact investment’. Environmental, Social and Governance (ESG) criteria, which have seen a rise in popularity in recent years, are helpful in some ways, but can ultimately be of questionable quality, and tend to lack consistency across companies, sectors and territories.
Equally, the availability of funds that steer clear of tobacco and defence technology was once seen as a great step forward for the sector, but is now starting to be seen as almost a given. Many modern, savvy investors, particularly amongst the millennial market, want to understand in much greater detail the implications of their investments, and assess whether it aligns with their own personal ethics.
The Global Impact Investing Network has begun to define the core characteristics of impact investing, but in reality, once the asset management sector can bring some sense of clarity and standardisation to impact investment, it could potentially mark a turning point for the industry in stimulating widespread adoption of impact funds.
Settling for less?
Of course, the core question surrounding expectations of growth in impact investing is primarily based around one question – will investors ultimately settle for inferior returns, at least in the short-term, should that be the reality of the situation? There are a plethora of surveys that have been conducted suggesting that people would be more than happy to put their money and pensions into impact investment funds at the expense of greater short-term financial returns. But when faced with the cold reality of that fact, will it be true for enough of the investor community to make impact investing as big a business as many suggest?
Realistically, there are two sides to addressing this. On the one hand, it requires a shift in mind-set – at some stage, a critical mass of investors will need to actively choose long-term sustainability (financial, societal and environmental) over short-term gains. But on the other, companies in the sector will need to provide an evidence base for the long-term profitability and viability of impact funds, as well as create the appropriate products for consumers to feel confident they are making the right decision.
Cutting through the noise
One further point to consider is an issue that surrounds the financial services sector more generally in terms of its relationship with consumers – financial acumen and education. Policymakers have attempted for years to address low levels of financial understanding amongst the general public, largely to minimal effect.
Impact investment is only set to add to the complexity around personal finance. A simplified way of explaining the concept of impact investing, and what it means for savers in reality, will ultimately be key to ensuring confidence in the sector, and increased take-up of impact funds over the longer term.
According to the Principles for Responsible Investment, the world’s leading proponent of responsible investment, private investors’ capital is set to play a crucial part in ensuring that we achieve the UN’s 17 Sustainable Development Goals by 2030. In pursuit of this, subscription to a standardised definition and framework of ‘impact investment’, establishing a credible balance between a sense of mission and financial returns, and doing away with the jargon that currently prevails in the space will all be crucially important.
Organisations that can help to achieve all of this will not only being able to position themselves at the vanguard of impact investment from a regulatory perspective, but gain first-mover advantage in a commercial space that is only set to grow in the years to come.