What is... | February 5, 2016

What is impact investing?

Many of us would like to make our mark and help create a better world. But this can be easier said than done – especially when investing.

Traditional investing often seems all about balancing risk and return, with less attention paid to how profits are achieved or any negative consequences.Impact investing, involves investors actively seeking companies or projects which aim to have a positive effect – perhaps socially, or on the environment.

What goes around
Examples might include recycling companies, community health projects, or microfinance for small grassroots businesses in poor localities. ResponsAbility, Blue Orchard and Oikocredit are three big impact investment firms that focus on microfinance. The term impact investing may have been first used in 2007 by the Rockefeller Foundation, a US organisation dedicated to “promoting the wellbeing of humanity throughout the world”.

Relatively responsible?
Confusingly, some people in financial circles also like to talk about “socially responsible investing”, by which they mean something different from impact investing. 

Socially responsible investing is typically where investment choices with potential negative social or environmental effects are simply avoided during the selection process. This is a more passive approach to social responsibility. An example might be a fund that avoids investing in oil or tobacco.

Men and women on a mission
Research suggests many people would like alternative ways to support industries or issues that matter to them.In this Barclays paper, head of behavioural-quant finance Greg Davies says impact investing represents a middle way between investing purely for financial gain and simply donating to charity.

Those who are less risk-averse, younger, or wealthier can be most interested in the option, he says.But he notes also that impact investing often doesn’t offer the same returns as mainstream investments. There may be a cost to the investor, reduced liquidity, and higher risk. “Achieving social good at no cost to the investor may be the exception, rather than the rule,” Davies writes.

Satisfaction guaranteed?
Impact investing’s benefits, however, may include a greater sense of personal satisfaction. The cost can be important psychologically too – the Barclays paper suggests that people may not actually feel the emotional benefits of doing good if there is no associated cost.

One potential problem for the market is that people are naturally biased towards simpler choices and focus on the present, especially when a complex situation (or lots of paperwork) is involved that may not play out for years. And if people are overloaded with options, they may decide not to make a choice at all.

Growing the market 
Some suggest governments should provide tax breaks or other help to encourage people to engage in impact investing. Awareness of impact investing is not yet high. ING’s International Survey on Savings 2016 found that only 39% of people in Europe are familiar with the impact investing concept.

The market is growing but estimates of how fast may vary widely. One paper by the Rockefeller Foundation with JP Morgan and the Global Impact Investing Network suggests the impact investing market may pass $400 billion or even reach $1 trillion by 2020, due to long pent-up demand.


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