As we collectively become more aware of social and environmental issues, investors all over the world are starting to think about impact investing – an emerging asset class.
As defined by the Global Impact Investing Network (GIIN), impact investments are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
In 2008, the Rockefeller Foundation was the first to coin the term impact investing, starting a long conversation about how to use capital in a different way. According to JP Morgan, impact investments form an emerging asset class, which offers the potential for invested capital of $400 billion to $1 trillion and profit of $183 – 667 billion over the next 10 years.
The impact investment market aims to address the world’s most complicated challenges in various sectors, including renewable energy, sustainable agriculture, humanitarian crises, air pollution, saving oceans from plastic and accessible and affordable basic human services, including education, healthcare and housing.
For many investors, the 17 Sustainable Development Goals (SDGs) defined by the United Nations have become a guideline for their impact investments.
Alongside impact investing, other ideas have emerged, including sustainable investment, ethical investment and socially responsible investment (SRI).
SRI stands for choosing investments according to environmental, social and governance criteria. The major difference between SRI and impact investing is that impact investing is more proactive in its strive for positive impact, while the SRI looks to avoid negative impact.
What is the difference of impact investing from traditional investing and philanthropy? Impact investing “combines” the two thorough the analysis of traditional investment and the philanthropic essence at its core.
Impact investing practice has the following major characteristics:
Impact investing breaks the mold that environmental and social matters can be resolved only by philanthropic donations and that traditional market investments only aim at getting financial returns.
Offering diverse opportunities to upgrade and drive the environmental and social solutions, impact investments could also produce financial returns.
Impact investing attracts various investors, both institutional and individual. Today, businesses are expected to do good. It is no longer acceptable to focus on profit maximisation only. It’s time to generate positive social impact.
For example, Blackrock – the world’s leading investment fund with $6 trillion assets under management – insists that companies should consider their social responsibilities and the need to “serve a social purpose”.
To prosper over time, businesses from various sectors must not only deliver strong financial performance, but show their commitment and contribution towards socially important issues.
Swiss financial corporation UBS has been a very active impact investor and launched their first impact fund that raised 51 million in 2015 and increased this sum to a record $471 million a year later. The money came from an impact fund that invests in cancer research initiatives and converted them into a commercially successful business.
For its efforts and commitment, UBS was named a sustainability leader in the Dow Jones Sustainability Index.
For a relatively new industry, the current impact investing market size is impressive. According to GIIN’s estimates, more than 1,340 organisations currently manage $502 billion in impact investing assets worldwide.
With a collaborative international effort to support impact investing and accelerate the development of an effective new market, experts predict that growth will increase in scale.
Impact investing is continuously growing, with many big investors getting involved and creating their own impact investment funds.
Something that is good for people and the environment is also good for companies’ performance. According to recent estimates, impact investing is here to stay and is going to grow exponentially over the next 10 years and beyond.
Philanthropy is no longer the only way to make a difference. Impact investing is considered one of the major drivers for positive change.
As an individual investor, you can also start making investments aligned with your values. Learn more about the SDGs, choose which one you cares about most and take action.
Originally published at capital.com