Will impact investing remain a niche area?

Written by Shelly Durrant,
Account Director

If you’re asking yourself, what is impact investing? Where have you been these past 12-18 months? Everywhere you turn are headlines and mentions of it.

Impact investing refers to investments made into companies with the intention of generating a measureable, beneficial social or environmental impact, alongside a financial return.

Impact investing has come a long way in recent years, however it still remains a niche area.

Last week, I attended the ‘LRI Summit 2018’ in Frankfurt and a hot topic of discussion was impact investing. A poll was conducted at the summit which asked attendees about the future of impact investing.  The response was as follows:

  • 21% said it will remain a niche area
  • 28% said it will become more widespread
  • 51% said it will become more integrated in a company’s fund selection and portfolio

Interestingly, a room full of ‘investment’ folk predict big things for impact investing with half of attendees viewing impact investing as going mainstream and becoming fully integrated into fund selection. One of the many reasons for this is millennials.

Millennials are progressively moving into this way of investing as they increasingly view social responsibility as an important selection criteria for their investments. The concept of impact investing, pursuing both a financial return at the same time as a positive social impact, allows younger people to strive towards both simultaneously.

Furthermore millennials are applying pressure to their parents and grandparents when it comes to managing their portfolios. A colleague recently mentioned that his son was extremely critical of his portfolio when he noted the investments included drink and tobacco companies. He highlighted to his father that while the returns may look attractive, he was investing in companies who were not consciously trying to be environmentally and socially responsible.

There are many global environmental and social issues from air and plastic pollution, limited access to clean water, hunger and mental health, lack of education, and homelessness, to name a few. More than ever before, millennials are aware of the problems plaguing the world and are wanting to make a difference.

Impact investing almost provides that instant satisfaction. Millennials are the generation that is used to having everything at their fingertips with digital advances. No one wants to wait 10, 20 or 30 years to start making or seeing a difference and impact investing allows people to make a difference right away.

It’s not just millennials supporting positive environmental and social change. The UK high street is more on-board than ever before. This year we’ve seen a number of supermarkets and coffee shops reduce the amount of plastic they use. For example, coffee shops are now encouraging customers to bring their own re-useable cups and in return will offer them discounted coffee. Another example is a leading supermarket that has recently changed from plastic cutlery to wooden in its food halls.

Despite this upward rise in impact investing, there are a number of things missing from the investment industry’s articulation of this, as recently highlighted in an Investment Week article by Lauren Mason, including:

  • Better education. While the growth in impact investing is promising, there remains a lack of understanding of what impact investing truly means and how it makes a difference.
  • Comparable information. There is lots of data out there, however, it has not kept up with how quickly the market is moving and swiftly ends up outdated.
  • Showcasing of ESG investment case studies. There are many DIY investors wanting to make a difference through impact investing but often don’t know where to start investing.
  • Industry standards. To take impact investing mainstream, there needs to be clearly defined standards to measure impact in the same way it exists in traditional financial markets.

There is still some way for the investment industry to go but better communication of the above points and a championing of industry standards would go a long way in taking what is currently a niche area, mainstream.

No matter what side of the fence you sit on, it’s hard to deny impact investing is making waves.

 

 

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