According to the latest report from Morgan Stanley’s Institute for Sustainable Investing, enthusiasm for impact investing is now higher than ever. This may come as no surprise as activists such as Greta Thunberg and the Extinction Rebellion movement ensure that global warming dominates the front pages.
The urgency of the climate crisis, combined with a growing awareness of widening global wealth inequality, persistent gender pay gaps and insufficient global access to healthcare, is making investors question the social and environmental impact of their investments.
While the general population is starting to take notice, women and millennials are driving the trend. And this group will soon have the power of the purse: according to CNBC, women and millennials will inherit over $68 trillion from the baby boomer generation over the next 25 years.
What is impact investing?
Impact Investing is increasingly used as a catch-all phrase for any investment made to achieve both positive financial returns and social/environmental impact. There are a number of different strategies that fall into this bucket, however, including public market funds made up of listed companies with good social or environmental records, and private market direct investments made by private equity investors and mission-driven institutions.
Impact Investing is no fringe industry: The Global Sustainable Investing Alliance reports that $23 trillion of global assets are invested using socially responsible investment strategies, with $12 trillion invested by the U.S. alone.
Is there a financial trade-off?
According to the report, investors no longer believe there has to be a financial trade-off to make impact investments: 86% of respondents believed that Envionmental, Social and Governance (ESG) practices can lead to higher profitability and could be better long-term investments. This belief is backed up by facts: in the Global Impact Investing Network’s 2019 annual survey, over 90% of impact investors reported performance in line with or exceeding both impact and financial expectations.
Setting return expectations is important. Unlike traditional investments, where all investors hope to make a positive financial return, different types of impact investors have different types of return expectations. The Omidyar Network calls this the impact investing ‘Returns Continuum.’
Some investors, such as private equity firms or high-net-worth individuals, typically expect above-market-rate returns. Others, such as foundations and grant-makers may expect little-to-no return, favouring outsized impact over financial performance.
The bottom line is this: whatever your financial goals may be, your impact investments can meet or exceed your expectations.
Does Enthusiasm = Action?
While enthusiasm is at an all-time high, does this actually convert to dollars invested? According to Morgan Stanley, the answer is yes, but not equally. While 85% of the general population and 95% of millennials are interested in sustainable investing, only 52% of the general population and 67% of millennials have adopted at least one sustainable investing activity.
If most investors are convinced that they don’t have to give up returns, what is driving this gap? Two main causes: a lack of standardised impact reporting and a lack of product choices.
Impact measurement and reporting is notoriously opaque. Different managers and companies use their own metrics to measure impact, making it nearly impossible to compare and benchmark amongst firms. As interest and adoption grows, the impact industry has to develop clear, standardised metrics to measure non-financial performance so investors can understand exactly what their dollars are doing.
The report found that the range of products and solutions in the market hasn’t kept up with investor demand. This provides a huge opportunity for investment advisors and asset managers to create products to win the assets stuck in the gap.
What does this mean for your career?
Impact Investing is not going anywhere and will only grow in size and sophistication in the years to come. Now is the time to transition into impact investing.
Companies across sectors and industries need to find ways to do business sustainably to be able to compete in a future dominated by socially and environmentally conscious consumers. Investment managers have to create more products to enable investors along the returns continuum to align their cash with their conscious. There will be huge demand for experienced and passionate executives to help drive these initiatives.
Get in touch with our Impact team
Our Head of Impact Sector, Grace Thomas, can be reached at email@example.com or on +44 203 637 1012.
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