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Defining Impact Investing
Impact investments are investments made into organisations, projects or funds to intentionally generate measurable positive social and environmental outcomes alongside a positive financial return. Impact investing covers a range of different asset classes and investment strategies.
Impact investments have three layers:
Impact investments are investments made into organisations, projects or funds to intentionally generate measurable positive social and environmental outcomes alongside a positive financial return. Impact investing covers a range of different asset classes and investment strategies.
1. Intentionality: Specifically designed to deliver a positive social and/ or environmental impact.
2. Measurability: Measure and reporting of progress towards the stated impact.
3. Financial Return: Generation of a financial return.
“I think the definition of impact investing has two aspects, intentionality and measurability. It’s not an impact investment if they’re not measuring the impact, and it’s lacking intentionality to create a positive benefit”
– Fiona Thomas, General Manager & Financial Adviser at Ethinvest.
It is this intention that provides investors with the opportunity to make a financial return in alignment with their values and vision for how they wish to see positive improvements made within society or the environment that defines an impact investment.
Many investors participate in impact investing, including public and private foundations; family offices, banks and other institutional investors such as superannuation funds and insurance companies; governments; fund managers; community finance organisations; and individual investors.
When investing for impact, you can invest specifically in a single project that supports a particular strategy, theme or area of investing or seek to invest in a portfolio that provides access to a range of impact-driven strategies and themes.
Impact investments can be made directly into an organisation or via a managed impact investment fund. They will typically come in the form of a loan (debt) or private ownership of an entity (equity) and span different asset classes. In recent years, impact investing has also become available to investors via listed equities. Today, investors can access impact investing through most asset classes, including:
- Fixed income (green bonds)
- Hybrid investments (such as social / sustainability bonds)
- Real estate
- Private equity
- Listed equities
“I see impact investing as having a place within an overall investment strategy, as opposed to the only solution or approach for a client’s portfolio. When it comes to impact investing, it’s a great diversifier because many fund managers select companies that aren’t in your typical traditional investment portfolios”
– Kevin McDonald, CFP, Principal Adviser & Director of Future Focus Financial Planning.
The Factors Driving Demand
The rapid growth in demand for impact investments, particularly since 2012, is driven by a number of factors:
1. Shifting Client Values
The shifting values of consumers and increased consumer consciousness have resulted in a surge in demand for impact investments. Many more clients from retail investors to institutions seek to ensure their investments align with their missions and values.
2. Strong Investment Outcomes
More sustainable companies have demonstrated that they make better investments, with a recent research by the RIAA showing that responsible investments have outperformed the overall market.
“If you look at the fundamentals of an ethically focused business, they’re likely to represent a stronger business model from a longer-term perspective due to the sustainability of their operations and the industries they operate in”
– Hope Evans, Financial Adviser & Director of Simply Ethical Advice.
3. Risk Reduction
It is now apparent that many companies cannot thrive, particularly longer-term, without considering sustainability issues such as environmental issues (pollution, climate change, resource scarcity), social issues (local communities and employees’ health, wellbeing and safety), and governance (prudent management, business ethics, board management and appropriate pay structures) of their business. Assessing these issues alongside financial performance supports better investment decisions.
4. Accessibility
Until recently access to the majority of impact investments was restricted to high-net-worth individuals, sophisticated investors and wholesale investors. However, access for retail investors is shifting fueled by the increasing demand of investors and the issue of many new and interesting products on the market.
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