November 16, 2020
Written by Alex Kneafsey, Anya Shah, Darsh Parikh
Edited by Grace Choo
Impact Investing: The Past
Over the last decade, impact investing has become an increasingly prominent topic in the business and public policy worlds. Impact investors are motivated by a desire to advance social or environmental goals. Intuitively, it is more effective to simultaneously pursue the goals of investment returns and social or environmental returns, rather than to keep them separate. Responsible investing dates back as far as investing itself: in the 18th Century, the Quakers and Methodists laid out clear guidelines to followers over the types of companies in which they should invest. However, the groundwork of the modern impact investing market was laid in the 1960s with the emergence of civil rights movements, ‘escalating the sensitivity to issues of social responsibility’. By the 1980s, the SRI value proposition in major world markets had become popularized, with many corporate firms acknowledging the ESG principles familiar to us today.
The term itself dates to 2008 when the Rockefeller Foundation first coined the term impact investing when there was an emerging conversation on how to use capital differently. However, the global financial crisis of 2008/09 provided a stark reminder of the interdependence between societies, economies and financial markets and suggested that market pressures did not always result in ideal outcomes for the wider good. The crisis nearly brought the world to its knees, but it helped re- emphasise the role of investors, as long-term owners of companies, to ensure good stewardship. From the announcements of their newly launched impact investing funds by BlackRock and Bain Capital in 2015, to new policy initiatives driven by leading nations, diverse industry and policy leaders have been promoting impact investing as a solution to a range of social and environmental challenges. The proliferation of impact investments has continued, and today, there are $40.5 trillion in ESG assets being managed professionally around the world.
Impact Investing: The Present
The current impact investing market is close to a staggering $715 billion today and is rallying further despite the pandemic hampering global markets. Even today, 67% of investors aim for risk adjusted, market returns while others aim for below market rate returns based on their risk profile, financial motives and portfolio composition. 99% of respondents agree that their assets have performed in line or exceeding their twin expectations of desired financial returns and satisfactory social impact.
With a growing awareness of climate responsibility especially, impact investing into areas such as alternative energy sources and plastic alternatives have significantly grown in the past decade. However, this seems to be slowing down as the increase in global investments in renewable energy grew to just $282.2 billion from $280 billion from 2018 to 2019. This is expected to slow even further with the pandemic hurting fund managers and investors alike. Nevertheless, once the pandemic clears, there are expectations that impact investing will regain its prolific nature as people become more educated and aware about social responsibility. This shift in mindset has been supported by the advent of social media and proliferation of liberal ideas amongst the youth, who are the drivers of change in today’s world. The future for impact investing is getting brighter and so are our futures alongside it. Although these figures are just estimates for now, they show a clear move towards this method of investing and a shift in the perspective of many.
Fund managers are increasingly encouraging their clients to invest in socially responsible funds as the MSCI KLD Social Index has outperformed the S&P500 on an annualized basis since 1990. Apart from renewable energy, investments into plant based meat is also very popular today – Beyond Meat’s share price has skyrocketed from 66.79 to 125.30 in just over a year and a half, highlighting to us the kind of interest the impact investing industry is drawing today.
Impact Investing: The Future
The recent pandemic also suggests an acceleration in the growth of the impact investing space in the near future. Covid-19 has unearthed multiple issues deep rooted in our societies and environments, some of which are common yet often overlooked. Impact investing may be the key to ensuring we are not left with the same problems we were before the lockdown. For example, homelessness has been exacerbated during this period and a booming house market of soaring prices has come alongside it. ESG and impact investing have the opportunity to aid in the growth of the affordable housing sector. Through impact investing, we can ensure that the post Covid-19 economic recovery will be an equitable one.
Investors seem to be taking note of this.PricewaterhouseCoopers’ (PwC) recent report into the future of the ESG investing space predicts that, in the best-case scenario, ESG investments as a share of European assets could more than triple by 2025. This would mean that within as little as 5 years, ESG investments would make up the majority (57%) of all investments of these assets. This report also outlines how this trend is mostly being pushed by institutional investors. Of the 300 investors that were interviewed for this report, over three quarters stated that they would stop buying conventional funds over ESG funds by 2022. Investors are becoming more aware of the benefits that moving the focus of their portfolio towards a better future brings not only to their financial returns, but to all aspects of our existence.
The future for impact investing is getting brighter and so are our futures alongside it. Although these figures are just estimates for now, they show a clear move towards this method of investing and a shift in the perspective of many.
Disclaimer: Due to differences in what classifies as impact investing, market sizing estimates of impact investing vary in methodology and final outcome. Thus, figures on market size of the impact investing industry, as well as AUM, may differ significantly across sources.
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