Ten years ago the term ‘impact investing’ was introduced to the world and by now has become a household name in global finance for investing with the intention to generate social and environmental impact alongside a financial return.
Impact investing turns ten years.
In 2007 Triodos IM embraced the term impact investing. Not only to strengthen the whole sector but also to strengthen what we had been doing for, at that time, over 25 years. The practice of making money work for positive change is, of course, much older, under different names. By embracing what we were doing – investing in renewable energy, microfinance and sustainable food and agriculture, to name a few - under this one term, we felt it would help in the communication with our investors. And it would also help in faster growth of the sector.
And it did. Impact investment has become a recognised term in the mainstream investment industry. What started as a movement has grown into USD 114 billion of impact assets according to the Annual Impact Investor Survey 2017 of the Global Impact Investing Network (GIIN). The survey includes 209 impact investors from around the world – up from 158 that participated last year. Of that group 57 percent made their first investment in the past ten years. The total size of impact assets is probably much higher as this number only reflects the contribution of the respondents to the survey.
A change in thinking: every investment is an impact investment
Apart from impact investing offering investable solutions to addressing today’s global challenges, its creation and rise serves another very important purpose: changing the way we look at investing. Bringing us back to the very core of investing: serving the real needs in society, serving the real economy.
I feel that financial markets have completely gone off track. High-frequency trading and a dominant focus on short-term financial gain has contributed to the emergence of a parallel, financial economy that keeps itself going without being connected to the true purpose of investing: creating value to the benefit of people, society and the environment. As a result, the role of investing as a means to realise goals or stimulate developments in return for a reasonable reward, has eroded.
The rise of impact investing has made clear that the current typical investment equation simply doesn’t include the impact on communities or the environment. It focuses on risk and return only. The impact of the investment is often not included in the investment decision, neither the positive nor the negative impact. This is a strange thing in itself as most people usually have a broader perspective on the consequences of their decisions. Luckily, we see investors increasingly take the social and environmental impact – both negative and positive - into account in their investment decisions. Investors that look at the ‘true return’ of their investments. A few examples:
Example 1: Fossil fuel divesting
An example is the divesting from fossil fuels. An increasing number of investors are shedding their holdings in oil, coal and gas, and for several reasons. Some are no longer prepared to take the increasing risk with oil and gas assets, which do not have a long-term future. Others recognise that by divesting in fossil fuels and investing in renewable and energy efficiency instead, they contribute to mitigating climate change.
Example 2: The future of our food
Or take food and agriculture. Several converging trends have put this sector higher on the investment agenda: food and agriculture are bound by natural resource limits on a finite planet facing rapid population growth, soil degradation, and loss of biodiversity. Furthermore, the risks of climate change magnify the challenges that food and agriculture systems face, hurting the most vulnerable on our globe first.
Example 3: The new normal: an impact/risk/return lens
These examples show that investors are increasingly replacing their risk-return lens with an impact-risk-return lens when looking at investments. We must, thereby, acknowledge that not all positive change nor all negative impacts can be quantified or monetised. It is difficult to incorporate all impacts of investments, but important steps are being taken to improve on that . For example, True Cost Accounting that looks at the usual financial values within a company and calculates the impacts on the natural and social environment in which the company operates.
Interestingly enough, there is also a good thing about this, as it requires investors to look beyond the numbers and to bring back human judgement and common sense. It requires the willingness and effort to really know what your money is doing. And it requires self-knowledge about what you really value. Because only then can money be invested consciously.
Three defining trends for the coming ten years
To conclude, I see three key developments that will further strengthen the power of impact investing:
1. Impact investing for all
Impact investing is not a new game that only a select few can get to play. What I see is that many individuals, especially millennials, want to make their money work for positive change. They care about social and environmental issues when building their portfolios. That means they must get access to sustainable investment opportunities. Unfortunately, at present, individual investors in many countries are blocked from putting their money in sustainable investments. Many of the regulations related to offering investment products are designed to protect citizens from risks they may not be able to assess. It is important to find a way to protect investors and give them access to sustainable investment opportunities at the same time.
2. Partnerships for investable solutions
We need to work together: governments, NGOs, private sector, academics and citizens. Two global agreements bring these stakeholders together: the Paris Climate Agreement and the Sustainable Development Goals. Both agreements serve as a framework and inspiration for the coming years, giving context for impact investing. Partnerships will play a crucial role in creating investable solutions to the challenges that we face.
3. New economic models
We need to challenge ourselves to design an economic system that delivers for everyone, while safeguarding the living world on which we all depend. This is what Kate Raworth, a British economist argues in her book Doughnut Economics: seven ways to think like a 21st economist. Our economic activity should operate in the space (shaped like a doughnut) between a social foundation and an ecological ceiling.
Realising a true return
How we invest determines what the world will look like in the future and as such we are all responsible for shaping our future. As Kate Raworth says: ‘We are all economists. It is about new economic doing; the innovators who are evolving the economy one experiment at a time. We all have a hand in shaping that evolution, because our choices and actions are continuously remaking the economy and not merely through the products that we buy or don’t buy.’
We all have an important role to play in co-creating this new sustainable economy and in realigning finance with society’s needs. And we all have to act upon that role and take responsibility.
When that happens in the coming ten years, we no longer need the term ‘impact investing’. Because the question ‘What is the impact on our communities and environment?’ will be asked and answered in most investment decisions. By doing so, we can realise a true return that balances between economic, social and environmental needs.
To read a follow-up interview by the GIIN about the first ten years of impact investing, download the PDF