What is impact investing?
Impact investing aims to protect and grow investors' money, while at the same time having a positive social or environmental impact. Here’s what you need to know.
What you'll learn:Click to toggle accordion What you'll learn:
What impact investing is.
How impact investing and ethical investing differ.
Whether investors have to sacrifice returns to make an impact.
Impact investing aims to protect and grow investors' money, while at the same time having a positive social or environmental impact.
Here, we explain what the main features of impact investing are, how it differs from ethical investing, and some of the reasons why investors may want to consider this approach.
What is impact investing?
The impact investing approach is still relatively new, but broadly speaking impact investments have two main aims:
- To tackle global social and environmental challenges by investing in companies which, though their practices, products or services, create a positive impact. This may be done through targeting specific outcomes, or by ensuring impact considerations play a key part of the investment process. Impact investments must measure and report their social and environmental performance or in other words, the non-financial impact they have.
- To provide financial returns alongside the societal or environmental impact. It seeks to ensure that investors do not have to give up returns for their investments to have an impact, though this cannot be guaranteed and investments can be made across many asset classes, sectors, and regions. Like any investment, the value of impact investments can go down as well as up, so you could get back less than you invest.
Impact investing may therefore appeal to you if you’re looking to protect and grow your assets, but also want to use your capital to target pressing social and environmental issues, particularly causes that are personally important to you.
How impact investing differs from ethical investing
Ethical investing involves sticking to a particular set of values. So, for example, some ethical funds use “negative” screening, which means they avoid certain sectors and stocks, such as armaments or tobacco.
An impact approach, however, considers both the positive and negative impact of the investment. So, for example, impact funds may hold more controversial investments, such as companies that produce genetically modified (GMO) food, as long as those companies can demonstrate they are taking positive steps to adopt a greener approach and improve the environment.
How big is the impact investing market?
As a relatively new and growing sector, measuring the size of the impact investing market can be difficult. However, according to the 2014 annual member survey from the Global Impact Investing Network (GIIN), $46 billion of investments were made by members.1 In 2017, this figure had nearly tripled to $114 billion of investments.2
There are various factors driving the growth of impact investing. These include, for example, the UN Sustainable Development Goals, which has committed 193 countries to social, environmental and economic targets for global development. Developing countries are estimated to require another $2.5 trillion to deliver on their commitments.3
Do investors have to sacrifice returns to make an impact?
It’s a common misconception that investors have to give up financial returns to make a positive impact.
Impact investments generally perform like any other investment. Some will meet their targeted returns, some won’t, and some will exceed them.
Certain impact investors, however, such as not-for-profit fund managers and foundations, may target lower returns in line with their strategic objectives, although most investors surveyed by the GIIN in 2016 said they pursue competitive market-rate returns.3
Like any other investment, it’s important to remember than with impact investments your capital is at risk, and you may get back less than you originally invested. You may get more or less return than you might have done with a non-impact approach.
Please bear in mind that this article is for general information purposes only. If you are unsure where to invest, seek professional independent advice.
Remember, the value of investments can fall as well as rise and you could get back less than you invest. Seek independent advice if you’re unsure of this investment’s suitability for you.
Through impact investing you can combine a traditional investing approach with more philanthropic aims.
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