What is Impact Investing? [Is It Effective Financially & Environmentally]

Could impact investing have the power to change the world for the better and improve your finances?

It’s very possible. Impact investing is one of the newest forms of investment strategy to hit the financial world.

It’s like traditional investing in that money gets injected into a company with the hope that it increases in value. But impact investing comes with a big difference. An ethical difference.

Ethics and positive impact on the world are considered just as highly as the potential financial return. This is the key factor that makes impact investing a worthwhile and important strategy for a better world.

It’s also a reason why some investors don’t see it as effective as other investment forms. However, as you’ll find out, this is a rather old and outdated view.

With that in mind, let’s take a look at what impact investing is, why positive investing is important and assess how effective it is.

What is impact investing?

Impact investing is a fast growing investment strategy with the two-pronged goal of doing good and making a financial return. It’s one of the latest forms of ethical investing.

More specifically, impact investors have the intentionality of wanting to generate positive environmental and social benefits through the business they are providing capital to. All whilst making a return on their investment in the future. It challenges the traditional view that positive change can only come from charity.

The term ‘impact investing’ was first coined in 2007. Although it has been practiced informally for many years, impact investing has only recently become a recognised investment strategy.

Many different types of companies can be the recipients of impact investment, including for-profit, not-for-profit, social enterprises, B Corps and many more.  

Impact investing is a powerful tool for change. It can take place in a variety of different industries, including, but not limited to, sustainable agriculture, healthcare, renewable energy and building more sustainable societies.

In order to address social and environmental issues, many impact investments have an alignment with the UNs Sustainable Development Goals. These 17 overarching goals aim to solve prominent worldwide issues, such as no poverty, clean water, renewable energy production and climate action.

Quite literally, impact investing is the belief that money can and should change the world for the better.

What is the difference between ESG and impact investing?

ESG investing and impact investing are both forms of ethical investing. There are clear crossovers between the two, but also clear distinctions.

ESG is the grouping together of environmental, social and governance practices. ESG investors will assess each of these areas within a company to identify potential risks and opportunities, alongside the traditional financial analysis performed by investors. 

The companies identified through ESG investors as ‘good to go’, are generally good, upstanding corporate operators. However, the main objectives for an ESG investor is still to make a financial return.

With impact investing, the non-financial aspect of a company is held with the same regard as financial returns. In this sense, an impact investor wants the best of both worlds: social and environmental benefits alongside good financial performance.

The big difference between ESG investing and impact investing is that impact pro-actively supports the businesses who want to bring about positive change. Although there are likely to be blurred edges between the two forms of investing, ESG mainly wants to avoid the negative impacts.

Is impact investing effective?

With the dual purpose of impact investing in mind, its effectiveness needs to be judged on two fronts: financial returns and society or environmental benefit.

All traditional investors are interested in one thing and one thing only: financial returns.

Many of the old-school investors would probably roll their eyes at the prospect of impact investing due to its association with weak returns. Many assume that to do good, you sacrifice the financial side.

This just isn’t the case. Impact investing can very much hold its own in terms of financial gains thanks to the rapid and continuing change we’re seeing in the world.

In a meta-analysis of more than 200 sources, there was a remarkable correlation between sustainable business practice and financial performance. The study found that 88% of sources with robust sustainability practices had better operational performance, which ultimately leads to better cash flow.

Even further, it was found that 80% of reviewed sources with robust sustainability practices had a positive influence on investment performance.

The 2020 annual impact investor study by The Global Impact Investing Network (GIIN) found that 88% of impact investors reported their investments were either meeting or surpassing their expectations.

These stats show that sustainability and profitability are not incompatible, quite the contrary, they are highly complementary. 

What about the non-financial effectiveness?

Almost by definition, the non-financial effectiveness of impact investing is already incorporated into proceedings – it’s not an impact investment unless it’s bringing about positive social and environmental change.

The companies, their plans and goals have been vetted to ensure their service or product will bring about a benefit to society or the environment. The effectiveness of this can be, and will be, measured through performance reports and goal setting.

According to the 2020 GIIN impact investor survey, 99% of 1,700 investors reported that their investments were either meeting or exceeding their impact expectations.

An element of the perceived effectiveness will also come down to individual opinion on the project or company goal.

Is building new sustainable homes effective? What about new software to improve employee engagement? How about research and technology to improve regenerative agricultural performance? For most the answer will be yes these are effective forms of investment, but for others they might not be.

Why is positive impact investing important and gaining ground?

Impact investing is certainly seeing a surge in popularity.

It’s evolved out of its earlier formed ethical investment predecessors – Socially Responsible Investing and ESG investing – to become an investment strategy for good in its own right. And there are a number of reasons for its growth in popularity.

The first is that impact investing is important for the world. This may sound grandiose but it’s true.

More and more people, particularly of the younger generation, care about the environment, society and the direct effect they have on both. Millennials and Generation Z will have grown up knowing full well the negative effects that climate change and human activities are having on the world. 

For this reason, Charlie Macpherson, Impact Specialist at CIRCA5000 impact investment app, thinks sustainable investing is going to appeal much more to the up-coming generations and first time investors. If true, this will accelerate the trends in prioritising social and environmental responsibility.

As Charlie at CIRCA5000 pointed out, it means more people are aligning their everyday habits – from where they spend their money, which banks they use and where they invest – with their moral compass. This shift in change has developed hand in hand with new technology that has opened up the world and the choice individuals now have.

If people can have a positive impact and improve their finances, they are going to go for it.

Secondly, the outdated view that ethical investing means a reduction on financial returns is slowly dying out.

New industries, such as clean renewable energy and sustainable food production, are the future. They will soon take over the fossil fuel industry, which was once the place to make money, but now it seems like this industry is way over the hill.

The modern consumer knows this, which is why people are looking towards the future. This also makes the types of industries aligned with the Sustainable Development Goals much more appealing to potential investors, which not only take the form of investment funds but many individuals who are set to inherit big sums from parents.

How big is the impact investing market?

Over the last decade there has been huge growth in impact investing.

The latest figures from 2020 suggest that the impact investment market is now worth $715 billion. Year on year growth for the past decade has also been impressive, with many double digit growth years.

Many see this as a sign that impact investing has now reached the mainstream.

Combined with dedicated sustainable funds, the ethical investing market is worth well over $1 trillion.

Despite the headwinds of a global pandemic, there’s still a very positive outlook for growth in the impact investing arena.

Even big traditional investment firms such as Blackrock have stated that companies need to embrace change. Their CEO recently said: ‘To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society’.

If Blackrock are giving it the nod, you know it’s on the mainstream horizon. The major benefit to this is that it will have world benefitting consequences.

People want better and now there’s a genuine way to help it happen. Now more than ever, impact investing is likely to play a key role in contributing to social and environmental solutions.

How to start impact investing?

Most impact investing is done by institutions – banks, pension funds, investment managers and hedge funds.

However, it isn’t just for the suited and booted professional investors.

Many asset management houses and financial institutions offer ethical investment opportunities. Currently, these tend to be sustainable or ESG funds. They are also difficult for the everyday person to get into due to the complex systems and round-the-houses way that banks tend to go about business.

There is an easier way to start impact investing.

Thanks to the development of technology and digital platforms, there are now many types of impact investors and individuals from all walks of life who have started to invest with impact.

Ethical financial institutions, such as Triodos and WHEB, offer different types of funds including sustainable, ESG and impact.

Another way for an individual to start impact investing from the palm of their hand is with an impact investment app. I personally use the CIRCA5000 app but there are others like Triodos and WHEB who offer the chance to invest your money into impact funds.

CIRCA5000 do things slightly differently and give you the choice of three themes: People, Planet or People and Planet. This helps investors differentiate between their social and environmental investment preferences. Once set up, you can invest and keep track of your funds from their easy to use mobile app.

I’ve found the CIRCA5000 app to be a great starting point to get into impact investing. You can read my CIRCA5000 review here.

Wrap up on positive impact investing

I hope that’s managed to clear up a few things for you on what impact investing is and how it has the potential to make a positive impact on society.

Impact investing is an extension of other forms of ethical investing, but it seems to have a bit more purpose and pro-activeness behind it. This means that it could be a hugely effective strategy to put yourself financially, and the world both socially and environmentally, in a better place in the future.

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