Impact investing is on the rise, capturing headlines and the imaginations of investors and investment funds alike. Indeed, the Global Impact Investing Network estimates that the value of impact assets managed globally is $502bn.
Earlier this month, Osborne Clarke hosted a thought-provoking debate on Impact Investing – Fundraising for Good or Good for Fundraising? Keynote speaker Maggie Loo (Bridges Fund Management Limited) and our expert panellists including Hugo Llewelyn (Newcore Capital Management LLP), Jane Bowes (Threadmark), Cameron McLain (Giant Ventures) and Karen Ng (Big Society Capital) all shared their thoughts on this hot topic.
But what exactly is impact investing, why is it on the rise and what more needs to be done to ensure its success?
Impact investing is being used as an umbrella term for a wide range of investing philosophies united by the desire to make a practical and measurable societal and/or environmental impact. At its most straightforward, impact investing is not intended to mean compromising on the financial return that will be provided to investors. This distinguishes it from the related concepts of venture philanthropy, which has little to no emphasis on financial return, and social investing, being a hybrid of the two where financial returns are sought, but there is an acknowledgement that returns may be lower than the market rate.
A combination of factors are contributing to the rise in impact investing:
- Awareness: individuals are increasingly aware of societal and environmental issues, and big business in turn is seeking a reputational boost by demonstrating actions in and support for worthy causes;
- The "millennial effect": millennials are being credited with an increase in impact activity due to their desire to support businesses that align with their own views and values, and will reflect this in their buying or even investment choices;
- Data: early impact investors have been able to demonstrate market-level financial returns on investments, which has caused others to sit up and take notice;
- The UN Development Programme's Sustainable Development Goals: launched in 2015, these 17 goals provide a framework for business and investors to focus on their societal and environmental impact;
- Appeal for private capital: a number of institutions have highlighted the requirement for private capital to support the Sustainable Development Goals, as charitable and governmental backing will not be sufficient to bring the necessary changes targeted for 2030.
We have seen a number of exciting launches and deals, which demonstrate the continued interest and growth in this sector, including the following:
- June 2019: the UK government launched the Impact Investing Institute, combining the previous UK National Advisory Board on Impact Investing and the Implementation Taskforce on Growing a Culture of Social Impact Investing;
- September 2019: UBS announced a $225m investment in the KKR Global Impact Fund;
- September 2019: Schroders' purchased a majority stake in the Swiss impact specialists BlueOrchard Finance.
A key challenge for the sector is how to measure the impact and a number of specialist firms have developed tools to assist in measuring the tangible benefit that impact investing is having. However, there has been no formal codification of how the analysis should be undertaken, and as such it is difficult to compare results. Concerns have also been raised that the data can be manipulated for 'impact washing' i.e. massaging the output to make a given investment appear more socially or environmentally beneficial than it truly is. Work is being undertaken in this regard, and the Impact Management Project is working towards "coherent guidelines on how to measure, report, compare and improve". We expect conversations around this issue to continue over both the short and long term.
As impact investing continues to grow, it is likely that larger asset managers will buy up smaller niche firms in order to bolster their impact offering and credentials: purchasing not only the existing investment portfolio but also the expertise and knowledge. We also expect that individuals will become mobilised and empowered to take control of their personal investment power – something which is a key aim of the Impact Investing Institute. The Big Exchange, developed by the Big Issue, is due to launch later this year with a stated goal of disrupting the current financial system by giving back control to the individual so that they can make positive changes when making financial decisions.
Ultimately, the momentum behind impact investing is only going to increase, and we can expect its breakthrough into the mainstream to be a call to arms for socially and environmentally conscious investors, professional and individuals alike.