From recycling waste to reducing plastic consumption to going vegan for the month of January, more and more people today are conscious of the impact they have on the planet.
This outlook has extended to money, and specifically investing, as a new generation of finance customers start to raise questions about exactly where their money is being directed.
The growing attention towards companies that promote sustainability and good business practices isn’t just a trend – it’s a structural and permanent shift in behaviour, and aligning your money with companies creating a more sustainable future is the biggest bang for your buck way that our generation can collectively make an impact. In fact, it’s 27 times more effective at combating issues like climate change than going vegan or taking less flights combined.
Impact investing is relatively straightforward to define: it’s investments made into companies to generate financial returns plus social and environmental impact at the same time. It doesn’t mean giving up returns, in fact the most recent data suggests the opposite is true.
That last bit is exceptionally important. Other forms of investing, like Socially Responsible Investing (SRI) or Environmental, Social, Governance (ESG) investing, often get lumped in with Impact Investing, but they are distinct and – I think – much weaker in a few key ways. First, the returns don’t stack up because of how these funds are created. And second, the underlying positive impact is either non-existent or a bit of a stretch.
SRI involves screening out “bad” companies, like tobacco companies, that you want to avoid for personal reasons. This way of investing has been around the longest and is now a bit old fashioned. When the “bad” companies are taken out, the investor is just left with the rest, and that is not a strategy to create financial return or positive impact.
ESG investing came along in the 2000s and has ramped in popularity. It involves taking into consideration the E, S and G as risk factors when making an investment decision. For example, coal companies could be exposed to some future regulatory risk that would impact their stock price performance. It says nothing about the future that we want to live in, and it doesn’t make a call on whether the product or service the company is selling is good from an E and/or S standpoint. That’s why Coca-Cola and HSBC are often top of the ESG rankings tables: these companies aren’t exposed to any major ESG risk. But that doesn’t mean these are good investments or having positive impact.
Impact investments are distinct and the starting position is totally different. First we look at some of the big global challenges that we are facing, like climate change, and then we look at companies that are producing something that is trying to solve this problem at scale, often using technology to amplify their reach and impact. It’s these kinds of investments – into companies offering solutions using technology to problems underpinned by huge unmet demand – that offer the prospect for exciting financial returns and positive impact.
Until very recently this returns debate was a bit of a grey area, and this stopped the rise and potential of this way of investing. But with the data now showing the assumptions of bad returns were false, the mass adoption of this way of investing is just around the corner. And once mass adoption is underway, genuine impact can be achieved.
The more people invest this way, the more we can create a tidal wave of money flowing to companies around the world doing useful stuff for the planet and its people. Doing so in a scalable, profitable way, earning returns for the investor in the process. A win-win.
It’s a self-perpetuating, feel-good, trend: as more people start to invest with impact, growing consumer demand ensures that these businesses perform well, and as impact investment becomes the norm, companies up their game to become more impactful to attract attention and capital.
This positive cycle means impact investing is the most effective way for us to have a positive impact collectively.
And it’s never been easier to invest this way, using the phone in your pocket, starting from just £5
