Impact investing : the key to solving the world’s most complex issues?
Investors around the world are realizing that making money and furthering social good no longer have to be mutually exclusive.
The term “impact investing” was coined in 2007 by the Rockefeller Foundation to describe an investment that generates a measurable social and environmental impact while also producing a financial return. It challenges the long-held belief that only philanthropies should implement positive, impact-driven work, while market investors should focus solely on generating a financial return. Instead, at this intersection of finance and philanthropy, investors and financial institutions have the opportunity to solve the world’s most challenging issues while also increasing their own wealth — ultimately a win-win scenario!
As individuals place a higher degree of importance on social consciousness, sustainability, and ethics, impact investing has gained traction around the world. In Nielson’s 2015 annual Global Corporate Sustainability Report, researchers found that 66% of consumers globally were willing to spend more on a product from a sustainable brand. When examining millennials specifically, the percentage increased to 73%. A year later, a study by Cone Communications found that 75% of millennials would give up a higher salary to work for a socially responsible company. These statistics illustrate a general societal trend towards greater social and environmental consciousness and reveal one reason why impact investing has become an attractive alternative to traditional profit-generating investing.
Research conducted by Morgan Stanley in 2019 also found that 85% of all individual investors and 95% of millennial investors expressed an interest in sustainable investing practices.
So, is impact investing simply a trendy topic for millennials, or is it the key to solving the world’s increasingly complex problems? With its ability to generate a measurable social and environmental impact alongside a financial return, investors are seeing impact investing as an opportunity to address a wide variety of global issues in an innovative way. In 2010, JP Morgan classified impact investments as an “emerging asset class” with the potential for “invested capital of $400 billion — $1 trillion and profit of $183 — $667 billion” in the next 10 years. Flash forward to 2020, and the Global Impact Investing Network estimates that the current impact investing market size is worth $715 billion.
This industry offers the potential to yield a competitive financial return while also eliminating social issues related to healthcare system inequalities, access to education, clean energy promotion, and many more. According to the UK National Advisory Board on Impact Investing, “a rapidly growing number of mainstream investors are entering the field, such as Barclays, Bain Capital, TPG, Goldman Sachs, UBS, AXA and Blackrock. We believe impact will ultimately become a standard element of business and investment decisions, alongside risk and return.” Investors are quickly realizing that they don’t need to sacrifice financial returns to create a positive social impact; in fact, these socially responsible investing practices may even have the potential to increase their earnings. Philanthropies and charities no longer need to be alone in addressing the world’s social and environmental issues; instead, combined with impact investing, we can take action in a financially sustainable, purpose driven way.
By: Nistha Lohani