Fiducia Partners Insights - Impact Investing

Impact Investing: Can Investments Make a Return and an Impact?

September 13th, 2018 Posted by Family Wealth, Investment 0 thoughts on “Impact Investing: Can Investments Make a Return and an Impact?”

In the last year, the estimated value of the impact investing sector has doubled to roughly $228 billion in assets under management. Amit Bouri, CEO of the Global Impact Investing Network (GIIN), thinks the increase is due to the fact that investors are starting to recognise that they can use the power of their investment capital to address many pressing global challenges.

 

Investors of all sizes are jumping on board with BlackRock announcing in February that it was launching impact investment products and in July this year the Catholic Church hosted the third Vatican Conference on Impact Investing.

 

For those new to the term, impact investing is when investments are made into companies, organisations, and funds with goals for achieving social and environmental impact as well as a financial return. It has become increasingly popular among those with strong opinions and support for social or environmental causes looking at how their financial holdings can reflect their values and still make a reasonable return. A recent survey of impact investors, 98% said their investments were meeting or exceeding expectations on impact, while 91% were financially satisfied. Essentially, “doing well” and “doing good” don’t have to be mutually exclusive as many have previously thought.

 

Figure v Performance Relative to Expectations

GIIN Impact Investing

Source: theginn.org

 

In my world of connecting investors with opportunities and helping families manage their wealth I have become increasingly interested in impact investing and its ability to enable HNW and UHNW individuals to be explicit about their values and reflect them in their investment decisions. For families, impact investing works well as it seeks to make a return but also has the benefit of uniting families around shared values and the desire to leave a positive legacy for the next generation. Essentially it can reinforce the family brand.

 

Family offices often enjoy greater discretion and independence than other asset holders such as pension funds and insurance companies and are particularly well placed to move into impact investing. Given that family investment strategies are an outward display of family values, impact investing is likely to gain more traction among discerning families. Additionally, according to Morgan Stanley 86% of millennials have expressed an interest in sustainable investing and are more than twice as likely to invest in companies that aim for social or environmental change than those that don’t. Couple this with the knowledge that millennials are set to benefit from the biggest inheritance boom of any post-war generation, if family offices aren’t already forming strategies around impact investing they really should be.

 

However, when seeking to become involved in the market one should tread carefully. Due to its speedy growth and subsequent lack of one widely acknowledged definition some in the investment industry are misusing the term to market a wide variety of products as impact investments. It has also attracted a number of unscrupulous characters preying on those with a social conscious as evidenced by the number of carbon credit scams. To address this issue, at next month’s IMF-World Bank meeting in Indonesia, The International Finance Corporation, the World Bank’s development finance arm, will announce “13 principles of impact investing” in an effort to define the practice and stop organisations wrongly using the term for gain.

 

For now though, it is useful to think about it like this, while under the same umbrella of sustainable and responsible investing, impact investing goes further than just excluding certain investments or integrating environmental, social and governance factors into investment decisions by targeting an intended impact which is then measured and reported on.

 

This figure from the World Economic Forum shows the relationship quite well:

Sustainable, responsible and impact investing approaches

Some investors are even measuring “impact” by how far their investments go towards achieving the United Nations Sustainable Development Goals.

 

If you’re interested in impact investing but don’t know where to start B Lab produces an annual list of funds that are seen to be helping build a credible marketplace by having their impact verified by a third party and reported in such a way that comparisons are possible. Whether an individual investor or a family office, I think this is a good place to start as it shows what I think is currently the industry’s best practice. Here is B Lab’s 2017 list.

 

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