In recent years, impact investing has gained considerable traction, promising not just financial returns but also measurable, positive social or environmental impacts. Once considered a niche, this form of investment has evolved into a significant trend that’s changing how people view the capital markets. Whether you’re an experienced investor who attends impact investment conferences or new to the game, these eight interesting facts about impact investing might surprise you.
1. It’s Not Charity
A common misconception is that impact investing is synonymous with philanthropy. However, the two are distinct. Philanthropy involves giving money with no expectation of financial return, focusing solely on societal benefit. In contrast, impact investing aims to achieve both financial returns and social or environmental outcomes.
2. Growing Market
The Global Impact Investing Network (GIIN) estimated the global market size for impact investing to be $715 billion in 2020. Experts predict that this number will continue to grow as younger generations increasingly prioritize ethical considerations in their investment decisions. Moreover, larger institutional investors are beginning to incorporate impact strategies, further amplifying the sector’s growth.
3. Wide Range of Asset Classes
Impact investing is not confined to equities or debt; it spans multiple asset classes, including private equity, venture capital, and even real estate. This flexibility enables investors to diversify their portfolios while still making a positive impact.
4. Diverse Impact Areas
Impact investing covers a wide array of sectors, such as renewable energy, affordable housing, healthcare, and education, among others. This means investors can align their investments closely with their values or the causes they care about the most. For instance, someone passionate about combating climate change might invest in a fund focused on clean energy technologies.
5. Financial Returns Can Be Competitive
Some might think that impact investing sacrifices financial gains for societal benefits, but that’s not necessarily the case. Many impact investments offer competitive returns compared to traditional investments. A study from Wharton School of the University of Pennsylvania found that impact investing funds generated a median Internal Rate of Return (IRR) of 13.1% between 2000 and 2014, which was comparable to benchmarks in similar asset classes.
6. Measurable Impact
One of the defining features of impact investing is the emphasis on measuring outcomes. Traditional investments usually focus on financial metrics like ROI (Return on Investment). However, impact investments go a step further by also assessing the social and environmental impact through indicators such as tons of carbon reduced, number of jobs created, or number of people provided with clean water.
7. Gender-Lens Investing
A subset of impact investing is gender-lens investing, which seeks to advance gender equality while earning financial returns. This approach can involve investing in companies led by women or those offering products and services that benefit women and girls. The gender-lens approach has seen increased attention, partly due to data suggesting that companies with diverse leadership often perform better financially.
8. Regulatory Support
As impact investing grows, regulatory bodies around the world are beginning to recognize its potential for positive change. For example, the European Union has introduced disclosure regulations that require investment firms to report on the impact of their products. Similarly, in the United States, there have been legislative proposals aimed at encouraging impact investments, particularly in underserved communities.
In conclusion, impact investing is an evolving field that offers an exciting blend of financial gains and societal benefits. Its broad range of asset classes and impact areas provides opportunities for all kinds of investors, from individuals to large institutions, to align their investments with their values. As the market continues to grow and mature, the future of impact investing looks promising, potentially reshaping the landscape of investment as we know it.
