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The impact of Impact Investing
ESG
Ida Kassa Johannesen
Head of ESG investments, Saxo Bank.
Impact Investing seeks to have a measurable and positive impact on the environment and society alongside financial returns. Impact investors are socially/environmentally motivated and want to do good while making money. It is the smallest segment of responsible investments with USD 1.16 trillion in AUM worldwide as of December 2021 according to the Global Impact Investing Network (GIIN). Impact Investing should not be confused with philanthropy, which only seeks social returns, not financial returns.
The spectrum of capital
Source: Adapted from Bridges Fund Management (2014), PRI (2013), RISS (2019), UK NAB (2017), Impact Management Project (IMP) (2018). Approach.png (2048×1152) (phenixcapitalgroup.com)
Unlike other approaches of responsible investing, with Impact Investing, the impact must be intentional, measurable, and additional, which means that the impact would not have been achieved without the investment.
Historically, Impact Investing was associated with private equity, private debt investments (green and social bonds), and real assets such as infrastructure and real estate, and was reserved for high-net-worth individuals and institutional investors. Recently, the public market offering for retail investors has grown steadily from pure-play Impact Investing managers and larger, well-established firms. Specific themes include renewable energy, healthcare, sustainable agriculture, affordable housing and microfinance.
Unlike other approaches of responsible investing, with Impact Investing, the impact must be intentional, measurable, and additional, which means that the impact would not have been achieved without the investment.
Historically, Impact Investing was associated with private equity, private debt investments (green and social bonds), and real assets such as infrastructure and real estate, and was reserved for high-net-worth individuals and institutional investors. Recently, the public market offering for retail investors has grown steadily from pure-play Impact Investing managers and larger, well-established firms. Specific themes include renewable energy, healthcare, sustainable agriculture, affordable housing and microfinance.
Why invest for impact
Every investment has the potential to impact society or the environment, either positively or negatively. While the choice of an investment is primarily driven by financial gains, it shouldn't come at the expense of people and the planet. An increasing number of investors embrace this idea, believing that investments should, in addition to offering financial returns, positively affect society and the environment.With Impact Investing, for instance, one can aim to (i) reduce greenhouse gas emissions to combat climate change, (ii) halt or decelerate deforestation to counteract biodiversity loss, and (iii) diminish social inequalities to address associated poverty and violence. Impact Investing prioritises companies that make a positive difference and provide capital to tackle some of the world's most urgent challenges. This investment approach supports achieving several of the UN's 17 Sustainable Development Goals (SDGs), including climate action, clean water, gender equality, and education. The significance of Impact Investing is profound. A McKinsey study revealed that in India alone, impact investments benefit 60-80 million people, equivalent to the population of France.”
The myth of underperformance
The returns of Impact Investing strategies range between competitive market returns and below market return, depending on the type of investments, the sector, size, geography, time horizon and approach. According to a 2020 GIIN' survey, the majority of impact investors target competitive market returns. Only a minority of these investors are willing to accept below-market returns in exchange for a positive social and/or environmental impact.
Risks and other considerations
- Similar to any investment, with Impact Investing, there's market risk, the risk that the value of your assets decreases. Depending on the locations of the investee companies, you might also face political and emerging market risks, leading to reduced liquidity and a lack of financial, legal, and social stability.
- The growing demand and interest for Impact Investing has led to large inflows into impact strategies and this can contribute to inflated returns for some companies that contribute positively to society and the environment. There is therefore, a possibility that if the demand for Impact investing goes down, performance might be negatively affected.
- Impact Investing faces challenges related to impact measurement and impact washing, where companies or fund managers exaggerate the impact their products or services have on society and the environment. With no standards for measuring impact, another challenge is how to measure and report it.
- As impact strategies deliberately exclude certain sectors, such as fossil fuels and extractive utilities, there's often a sector bias compared to the broader market. This can lead to a significant tracking error between a fund and its benchmark.
- It is worth noting that Impact Investing is an active decision that requires some involvement from investors. Therefore, it's essential to make an effort, both before and after investing, to understand the impact of one's investment by reviewing companies and funds' disclosures and impact reports. Impact investors could enquire about the impact of their investments by for example asking, how many jobs were created, the amount of carbon saved, the number of meals served, or any other social/environmental priorities.
How to invest for impact
There are several investment products available including individual stocks, mutual funds, and ETFs. You can browse through Saxo’s Impact Investing theme for a list of stocks and funds that have a positive impact on society and the environment.Before making any investments, you should consider your investment objectives, risk tolerance and time horizon and review the available information about the product on the platform.