The Rise in Impact Investing
Impact investing is the modern name of an idea that has existed since the 1700’s. It is only in the latter half of the 20th century that this idea got its first citation as socially responsible investing. Practitioners of socially responsible investing or impact investing as it is now popularly known, make investments into companies, funds and organizations with an intention to generate a measurable and beneficial social or environmental impact alongside a healthy financial return.
Over the last two decades this phenomenon has become more widespread and as per the latest survey done by GIIN (Global Impact Investing Network) the total AUM in impact investing assets touched 114 Billion USD. (2017)
When socially responsible investing (SRI) began it was motivated by political, social and religious reasons. Partnering or investing with those who earned money through alcohol, tobacco, weapons or gambling was not seen as ethically good investing. Furthermore, the nature of SRI when it began was not to actively select where to invest but rather focus on which investments to exclude. There was no analysis or defined structure. In the 70’s and 80’s however, things changed. As awareness amongst people increased on the social, environmental and political impact of funding and investing, investors started analyzing companies on environmental, social and governance aspects and the term ESG became popular. Investors started identifying the best companies doing those activities and achieving those objectives, and then incorporated them into their portfolio to achieve a financial return. Of the three aspects, governance was surprisingly the least looked at initially.
There has been a radical shift over the role of business in society. The impact of the financial crisis has at least affected investors in such a way that it has increased expectations from businesses as not just a means to generate financial return but also as having a wider impact on the society in which they operate. And this is what drives Impact Investing today – an active approach to screen companies on aspects other than just financial return. There is an increased consumer demand for market transparency – the need to disclose not just what product is being sold but also where it was made, under what conditions was it made and who all does it affect in the chain from design to delivery. There is long-term value created in the process which is now more attractive than it has ever been before.
In Silicon Valley for example, several entrepreneurs and start-ups are hinged on the idea of “collaborative capitalism” (a term which was developed by I-DEV International in 2009). At this center for growth and innovation, many complex societal issues are being tackled to change the world for the better. Impact investing focuses on a variety of sectors, such as renewable energy, green technology, disease eradication, clean water, sustainable agriculture, food, education, waste management and financial services. Impact investments can be made in both emerging and developed markets and, like other types of investments, returns can range from below to above market rates.
In Europe, many financial services firms have joined hands to collaborate on various impact investment projects. The European Impact Investing Luxembourg is one such example. We see firms such as Deloitte, Banque de Luxembourg, KPMG, Innpact, PwC, Elvinger Hoss, BNP Paribas, EY and the European Investment Fund supporting this information exchange platform. In 2014, the European Parliament passed a directive on disclosure of nonfinancial information, including environmental, social, employee-related, human rights, anticorruption and bribery, diversity, and other legal aspects related to sustainability which was a big move towards bringing such aspects to the forefront of analysis.
Large investment banks such as JPMorgan, Goldman Sachs and Morgan Stanley have ramped up the focus to build and expand their impact investment funds to find innovative commercial solutions that address social and civic challenges. Goldman Sachs Urban Investment Group has committed over $5 billion since 2001 to underserved American communities. JPMorgan published a research note which includes large scale data analysis or return expectations from more than 1000 impact investments and identified a potential profit opportunity between $183 to $667 Billion and a potential investment opportunity of $400 Billion to $1 Trillion in the next decade.
With the majority of the world population living in emerging economies, impact investing has a large role to play in inclusive development. Set up in 2005 in India, Ziqitza, a private emergency ambulance operator, brings affordable healthcare to some of India’s poorest people. The social enterprise operates around 1250 ambulances across 17 Indian states. Till date it has helped 3.2 million people get to hospital, saving thousands of lives in the process. Tiered pricing was their way to achieve such economic sustainability.
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