Sustainable investment has become a significant trend in financial markets as science and society address a growing range of issues that pose both risks and opportunities: biodiversity protection, water management, extreme weather events, diversity, equity and inclusion are just some of the topics on investors’ minds.
Increasingly, investors are asking themselves some fundamental questions: what sort of society do we want to create; what is our purpose; and are we living it?
The manifestation of this emerging worldview is the rise of impact investing as investors increasingly embrace an investment style that offers diversification of choice through a fresh and more unconventional approach.
The worldwide impact investing market has now broken the $1tn barrier and continues to grow. It reflects the demand pressure for the investment industry to be part of the solution.
Many investors are considering their purpose and reflecting on the type of society they want to live in, and the state of the planet they want to leave for future generations.
Investing impactfully
Impact investing focuses on identifying companies whose products and services are providing real-world solutions to the biggest issues we face globally.
Investing specifically in publicly listed companies allows impact to be made at scale as opposed to piece meal finance available from private investment or debt issuance.
Identifying impactful companies must focus on intentionality and measurability to ensure legitimacy — is the company actively embracing and driving its potential impact forwards, and are there metrics by which this impact can be measured currently and in the future?
For example, is the delivery of affordable housing central to the business model of a homebuilder, or is it simply an add-on to meet obligations or improve corporate reputation?
Does the homebuilder disclose the number of affordable units it delivers and the revenue these generate?
What would happen if this homebuilder no longer built affordable units? These are the types of questions that impact investors must ask to determine authenticity and magnitude of impact generated by potential investments.
By investing impactfully, we can use savings and investments as a potentially huge force for good in the world, and in doing so, gain the emotional reward experienced from helping others.
Research by Harvard Business School confirms this. Investing our money for social or environmental good is consistently associated with greater feelings of happiness and wellbeing.
Furthermore, a recent financial wellbeing survey indicated that more than two-thirds of UK citizens are concerned about issues such as social inequalities and climate change.
Compatible aims
There is, however, a widespread misconception that impact investing means lower returns.
The good news is that there is no need to choose between doing good socially and doing well financially. Generating long-term returns and supporting a healthy society are entirely compatible aims.
In a recent “Global impact investing network” report, 79 per cent of investors reported that their impact investments performed in line with or better than their expectations, in financial terms.
Research from Morgan Stanley concluded that sustainable funds combine competitive financial performance and reduced risk.
