To the uninitiated, socially responsible investing is often full of confusing terminology: What is Ethical, SRI, ESG? You could be forgiven for thinking that the latest social ‘impact investing’ strategy is just another unnecessary phrase to add to the mix, but it does in fact differ from the more traditional forms of ethical investing. Originally, ethical investing excluded large swathes of the investing universe which did not match the often very strong values established by religious establishments, trusts or charities.
So, what is ‘impact investing’ in a nutshell? Well, the hint is in the name. Unlike traditional ethical investing, exclusion is not the focus and consideration of environmental, social and governance (ESG) issues are not solely for risk management purposes. This type of investing goes a step further by investing in the shares or loan capital of companies and enterprises producing tangible benefits to society and the environment, alongside an acceptable rate of financial return. Most importantly, the impact being generated must be measurable and cannot simply be a by-product of a process already in place – the focus on intentionality is key differentiator from other forms of ethical investing.
This new style of investing has a growing appeal to a new wave of younger investors who are gaining traction. The new generation drawn to impact investing are deemed to be typically characterised by an optimistic outlook, a preference for “experiences” rather than ownership and perhaps a more open-minded and liberal approach. As we live in a world where social progress is occurring at an unprecedented rate, it is no surprise that they are keen to be actively involved in the changes they are witnessing as opposed to being mere observers. Impact investing is perhaps bridging the gap between satisfying people’s desire for social responsibility, whilst at the same time, achieving their individual goals as investors.
Impact investing has developed a new dimension to the socially responsible investment world and is enhancing the diversity of the investment universe from which we can all choose. Several impact investment funds have been launched which use the 17 UN Sustainable Development Goals (SDGs) as their foundation for assessing the impact of the companies they are investing in. These SDGs are a set of goals designed to tackle a range of issues encompassing poverty, gender inequality and climate change. This new generation of funds will only invest in companies that generate an impact which can be mapped to at least one of the SDGs.
Just claiming that they are making a positive impact on society and the environment is not enough. These funds are producing comprehensive annual ‘Impact Reports’ which outline their social and environmental performance and the progress of underlying investments, ensuring accountability and transparency. This measurement aspect of impact investing is core to socially conscious investors who often require evidence of the positive impact their investments are making.
Through impact investing, investors can earn a financial return and meet their social goals, which is why we believe this approach to investment will only become more popular in the years to come. This approach has laid the groundwork for a move beyond the traditional screening methods, to find innovative companies meeting current needs. In our view, it is transforming the landscape for socially responsible investing, but is yet to be fully embraced and understood by investors. In short, we think there is plenty of room for impact investing to become a core component of investment analysis and thinking.