Impact Investing is one of the key emerging asset classes gaining attention from mainstream investors. The world must evolve to become truly sustainable and investors are increasingly recognising the need to generate returns that go far beyond traditional profits.
“Investing can benefit all stakeholders, from the people that created the initial ideas, through to the end user and the surrounding community. Everybody benefits if a business is built with that mission in mind from the very beginning.”
N’Gunu Tiny, Emerald Group Founder, 2020
N’Gunu Tiny, Emerald Group Founder, 2020
The sector is growing across both private and public markets, and in 2019 impact investing reached a market size of more than £400 billion, according to the Global Impact Investors Network (GIIN). These investments are pouring into businesses and start-ups that intend to positively impact social and environmental issues, as well as financial returns.
GIIN defines impact as having two distinct pillars:
1. Intention behind the action.
2. Regular reporting of impact.
Impact made by a product is therefore challenging to define, and entrepreneurs must be able to show exactly who is benefitted by their product or service. Investors and start-ups, companies and entrepreneurs in this space agree the impact goals at the time of funding. It evolved from the recognised framework of Socially Responsible Investment (SRI), which is based on Environmental, Social and Governance (ESG) criteria. Impact Investment differs primarily because of the proactive intent from investors.
Social issues including humanitarian crises, climate change induced weather, lowering emissions and improving air quality in cities, confronting plastics in the oceans, transforming infrastructures into clean energy systems and food sustainability are the focus of impact investors.
Given the situation the world faces, with irreversible environmental damage impacting humanity on a growing scale, there has been a fundamental shift in society. Businesses are now expected to prioritise what they can do for society, rather than just profit maximisation.
Society is turning to the private sector and demanding that companies and investors change the conversation. Public expectation is filtering into investor decisions, and businesses are now focusing on how they can increase profits and benefit the communities in which they work.
Impact investment is very different to the traditional capitalist economic environment. While looking for financial returns, they also target financial institutions, SGBs and businesses that have the potential to make positive changes.