Here’s what impact investing is all about, what the benefits are, and key trends you need to know.
While the term was first used in 2008, “impact investing” has recently risen in popularity and is now capturing the attention of mainstream investors. This includes similar styles of investing such as conscious capitalism, sustainable investment, and ethical investment. We’ve put together this guide to help you understand the concept, benefits, recent trends, and potential returns.
What Is Impact Investing?
Impact investments are made with the intention to create positive social and environmental impacts in both emerging and developed markets while generating positive financial returns.
They provide capital to address pressing challenges in various sectors, such as sustainable agriculture, renewable energy, real estate, conservation, microfinance, and affordable basic services, including housing, healthcare, and education.
Impact investing is similar to socially responsible investing (SRI), an often-used framework for choosing investments based on their environmental, social, and governance (ESG) criteria. The main difference is that impact investing is more proactive in its intention for creating positive impact.
Impact investments are characterized by four major tenets:
- Intentionality: An intention to have a positive social or environmental impact.
- Impact measurement: The commitment to measure and report the social and environmental performance of the investment.
- Expectation for return: The investment is expected to generate a financial return.
- Range of return expectation: The investment can span across asset classes to target a range of financial returns to meet the goal of an investment strategy.
The Benefits of Impact Investing
Impact investments are good for investors and great for the planet. Here’s how:
- Achieve market-rate returns: “Do good while doing well” is truer now than ever when global challenges also translate into global opportunities. In fact, the majority of the estimated $15 billion impact investments produce market-rate returns.
- Stabilize your portfolio: Impact investments have lower volatility than comparable non-impact funds. As such, they’re often great complements to other investments in your portfolio.
- Make your capital work harder: Investments in social, health, and environmental causes can have a much higher ROI compared with making a grant or donation.
- Achieve the triple bottom line of “people, planet, profit”: align your personal values with your investments and signal your commitment to be a responsible investor without compromising returns.
- Connect with innovators and thought leaders: Impact investing attracts people from diverse backgrounds. From leading entrepreneurs to human rights activists, it opens up opportunities for you to connect with like-minded change-makers.
- Meet global challenges: Private capital fills the gaps where government funding falls short. They have become essential in solving the world’s most pressing problems, such as climate change, extreme poverty, and limited access to healthcare and education.
- Create opportunities to boost emerging economies: Investments in emerging markets create employment opportunities and can provide microfinancing to people in third-world countries.
- Support institutional and family foundations: These organizations can leverage the increased capital to advance their core social and environmental goals while maintaining or growing their overall endowment.
- Raise awareness on key issues: Impact investments bring social and environmental issues to the forefront by showing the economic benefits of addressing these challenges while capturing the attention of the general public.
The ROI of Impact Investments
Some investors might doubt that the concept of “do good while doing well” is too good to be true, but that’s not the case. Multiple studies have shown that sustainable investments can deliver competitive returns:
- A study by Morgan Stanley found that sustainable equity mutual funds had equal or higher median returns than traditional funds 64% of the time.
- A report published by McKinsey on impact investments in India found that the top one-third of deals yielded a median IRR of 34%.
- A survey by GIIN found that the performance of impact investments met or exceeded investor expectations for both social and environmental impact and financial returns.
Key Impact Investment Trends for 2020 and Beyond
Impact investing will continue to be a key focus for many investors who want to meet their social responsibility goals without compromising wealth generation and preservation. Here are some trends that will drive impact investing in the coming years:
- Stocks of well-governed organizations will likely perform better than those of poorly-governed firms, while corporate eco-efficiency and environmentally responsible behaviors will increasingly drive stock market performance.
- Opportunities beyond the environmental domain will gain even more traction. The top areas to watch include food and agriculture, energy, healthcare, education, housing/real estate, and microfinance.
- Millennials will drive momentum in impact investing as young entrepreneurs combine their commercial acumen and tech-savviness with a deep-rooted desire to address global issues.
- Impact investments that focus on climate change will attract increased attention. These include solar and wind energy projects, battery storage solutions, sustainable transport, and sustainable agriculture.
How To Get Started
You can build a portfolio of impact investments by working with experienced managers who understand the market. In particular, real estate and agriculture investments in emerging markets are great opportunities for investors seeking high yields. For example, our Colombian coffee investment opportunity takes a holistic approach to the coffee sector and is committed to adhering to the best environmental practices. This approach will not only increase the long-term profitability and sustainability of the business as well as investor returns, but also improve the quality and taste of the coffee.
Fill out the form below to learn how you can get involved and do good while doing well.
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