Types of impact investments
Impact investing comes in many different forms, but all types of investments must be intentional and measurable. Investing to make a positive impact also means aligning investor beliefs and values with the allocation of capital to address social and environmental issues. The growing impact investment market can cover all asset classes, providing capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, and affordable and accessible basic services - including housing, healthcare and education.
Some common examples of impact investing include companies that are creating solutions to global problems in areas such as housing, health, education and green energy as well as businesses who are helping to make a real-world impact through social and environmental action.
How to measure the positive impact
Investors who use impact investing as a strategy usually consider a company’s commitment to solving the world’s biggest social and environmental problems or the company’s sense of duty to positively serve society as a whole. The type of impact that can be generated by impact investing varies based on the industry and the specific company within that industry, that’s why savers who choose impact investments for their portfolio, place precise expectations not only on the returns, but also on the social and environmental impact they want to see. For impact investing to be fully effective, the impact must be measured and reported in a timely and transparent manner.
For this purpose, companies often reference the 17 Sustainable Development Goals (SDGs) set by the United Nations with the 2030 Agenda. The SDGs recognise that “ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth - all while tackling climate change and working to preserve our oceans and forests”. For each of these goals, companies must define their strategies and translate them into a series of targets to be measured at regular intervals through objective and other metrics. In 2018, PwC found that 23% of companies globally disclosed meaningful Key Performance Indicators and targets related to the SDGs.
Impact investing and performance
While some investors have been making impact investments for decades, until a few years ago, impact investing was a niche market. This market’s now steadily growing, attracting a wide variety and a growing number of investors, both institutional and individual. In fact, a survey conducted by the UK Department for International Development, found that 68% of UK savers wanted their investments to consider the impact on people and planet alongside financial performance.
The widespread assumptions, that all impact investments are inherently riskier and provide lower returns, have been widely debunked by different research. For instance Morgan Stanley recently studied the performance of over 11,000 exchange-traded funds (ETFs) and mutual funds, and found that not only is there no performance trade off compared to traditional funds, but sustainable funds offered lower market risk. Further studies have demonstrated that environmental, social and governance (ESG) criteria have a positive impact on companies’ financial performance and overall growth. According to the Annual Impact Investor Survey 2020 run by the Global Impact Investing Network, more than 88% of respondents said that their investments were meeting or exceeding financial expectations.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 05-12-2024
