This year itself, we have seen the planet’s warriors clamour for change in September’s Climate Strikes. The United Nation’s Climate Action Summit gave us an unlikely hero in Greta Thunberg. And we know that the global call for social and environmental change is not going to stop anytime soon. As an investor, what can you do to help? Allow us to help you answer the question.
Investments have a far-reaching effect on society and are not merely an instrument to earn returns. When done right, investments can create jobs, build businesses, improve the economy, and have a far-reaching effect on the lives of everyone involved, and beyond. Investors have increasingly begun to realise the collective potential of their investments. These changes have paved the way for channelling investments in companies that can bring real and measurable change around us. However, it is crucial to understand that investors have always been conscious and relied on international norms and principles designed to address Environmental, Social and Governance (ESG) risks.
In the past, investors have been known to avoid investing in companies involved in the business of tobacco or gambling to prevent their investments from having a negative effect. These conscious efforts to make investments that have positive effects have given rise to impact investing over the past decade. Today, impact investing is slowly becoming a buzzword that is no longer restricted to institutional investors.
What Is Impact Investing?
Impact investing is taking the investor’s concern for the environment to the next level by investing in companies that bring a positive change in the society by supporting companies or funds that work towards bringing a positive social, economic, and environmental impact along with financial returns. The companies or projects could be involved in anything from providing affordable housing to working towards finding a solution to the water crisis.
The rising concerns pertaining to global warming and degrading environmental conditions have forced everyone from governments to individuals to act before it is too late to save the planet and the humankind. The efforts to work on pressing issues such as conservation, renewable energy, agriculture, and affordable basic services such as housing or healthcare have substantially increased in the past few years. Leading the way is impact investing which is estimated to be USD 502 billion as per a GIIN report. The number clearly indicates that impact investing no longer remains a speciality niche.
While individual investors have increasingly shown an inclination towards impact investing, institutional investors account for a huge source of investment directed towards impact investing. Banks, pension funds, family foundations, insurance companies, and government investors are now challenging the norms that only philanthropic donations are meant to work towards social and environmental issues. Increasingly, fund managers are also offering impact investing schemes to retail investors. This remarkable change can also be attributed to increasing demand by retail investors to make investments that produce results in advancing the UN Sustainable Development Goals.
Why Impact Investing?
According to a Morgan Stanley report, 84% of individual investors were interested in making investments that would have a positive impact on society and the environment. Impact investing clearly ensures a more direct change against ESG integration strategy which invests in companies that are better than their peers in conserving energy, reducing costs, and potential risks. Additionally, impact investing enables investors to make investments in companies with more direct and measurable outcomes. Interestingly, one of the top reasons for investors to consider impact investing is the intent to have a positive impact on society or the environment via investing.
To understand more about the why of Impact Investing, our Chief Kristals Officer, Arun Pai, talked with Pierrick Balmain, Head of APAC Business Development at BlueOrchard Finance Ltd; a renowned name in impact investing strategies. The FINMA-licensed company provides “innovative financing to emerging markets institutions while delivering financial as well as social returns to its investors.”
A recurring train of thought during this conversation was that impact investing is not just about the social impact it creates, it also has the potential to generate significant returns. As per GIIN’s 2019 Annual Impact Investor Survey, 66% of respondents expected risk-adjusted market-rate returns while 19% sought below-market-rate or closer to market-rate returns. Only 15% of respondents made an investment with the aim of capital preservation. A remarkable 82% of respondents reported that their impact investments were performing as per the expectations. The only risk for investors were management and business model execution.
Impact Investing: The Global Scenario
Imagine a world free of poverty, hunger, and inequity! 193 governments agreed on sustainable development goals to turn this imagination into reality by 2030. Signed in 2015, this utopian goal can possibly be turned into reality with impact investing. The world needs USD 2.5 trillion every year until 2030 to be able to achieve these goals. Global Asset Managers such as KKR, TPG, and Blackstone have launched impact funds which are expected to bring impact investing to the centre stage.
While impact investing is on the rise, a few common myths irrespective of the geographies have prevented investors from making full-fledged investments. Some of these include the belief that sustainable investing is philanthropy, it is a passing fad, it hurts financial returns, and only governments can bring any considerable change. This misinformation about the potential of impact investing has restricted exponential growth in the segment.
Impact investing is already a sought-after instrument in developed nations such as the United States of America. As per a US SIF report, the foundation identified US-domiciled assets worth USD 11.6 trillion whose mangers use the ESG factors in their investment analysis. An FT report indicates that after the United States withdrew from the Paris Agreement, the global action committee for impact investors is now hoping for China’s elites to start making investments for better social and environmental outcomes.
On the other hand, India too is fast becoming one of the most sought-after destinations for impact investing due to its growing population, stable economic growth, rising financial markets, and the strict rule of law. As per a McKinsey report, over the last decade, India has received over USD 5 billion in impact investments. The investment crossed a billion in 2016 alone and has been on the uptrend ever since. However, it is important to note that the majority (95%) of these have been foreign funds.
While the number and the huge possibilities in impact investing paint a rosy picture, things can easily go south as we saw in one of our earlier articles about Hyflux. The measurement of the success of any company that received impact investment funds remains one of the biggest challenges. The fact that the change brought about by impact investing is measurable makes it more reliable and trustworthy, but the huge number of methodologies to do so make it ineffective to a certain extent.
As impact investing continues becoming mainstream, it would be a challenge to democratise the industry and connect the millions spread across the globe who need the funds. For impact investing to grow further, it would be essential for new and even existing investors to be wary of the possibility of the sub-commercial returns. Even though the returns over a long-term could be comparable with the market returns, such expectation could lead to disappointment for the investors.
The continuous rise of the impact investing industry will bring about a change in the way impact investing firms operate. As they grow, more investments will be directed at established companies to scale quickly and show results. These certainly could deprive young businesses solving crucial problems of smaller amounts of money they seek to get off the ground. It would be critical for a business to balance the growth and help new businesses.
Impact investment in India has been restricted to certain sectors such as financial services which are comparatively easier to manage and predict when compared with the likes of agriculture or agricultural processing. Besides, certain sectors such as water which could have a huge impact may not find funds easily. The economic ramifications of the water crisis and the ripple effects it could have across industries has led to some fund houses rolling out Water ETFs, but ensuring that all such crucial sectors get funding will be critical for impact investing to succeed in the long-run.
Lastly, legislation which can clearly define the regulations, benefits, and other details pertaining to impact investing can elevate investors’ confidence. A mandatory annual reporting of a measurable impact that a fund may have created will also be essential for the sustainable growth of impact investing.
Bottomline: Is It Too Good To Be True?
It is reassuring at a certain level to look at the number and possibility of the immense growth for impact investing in the near future. But, is this something that should be taken with a pinch of salt? Can investing in companies that are helping the underprivileged or creating sustainable solutions actually save the planet?
While many believe that impact investing is just a passing fad and will not lead anywhere, the rising investment numbers speak otherwise. Perhaps, people across the globe are beginning to realise that impact investing may or may not save the planet in the long run, but it is the best available step at the moment to the save the only habitable planet for humankind.
The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.