The Growing Influence of Impact Investing

Economic consequences from the pandemic have spurred demands for investors to help rebuild societies with greater equity and social justice, using impact investing as a vehicle to pursue these objectives while simultaneously producing financial returns.

Many fund managers are proving this is possible. Banks, pension funds, financial advisors and wealth managers all offer clients investment opportunities through impact investments.

Millennials’ Comfort and Proficiency with Technology

Generations born after Gen X have grown increasingly comfortable with modern technology thanks to being immersed in computers and digital devices throughout their lives, becoming adept at understanding it well enough to use it towards achieving their goals.

Impact investing may grow increasingly popular among Millennials. Individuals use impact investing as a way of investing with social benefits as well as financial returns in mind – lending money to start-up businesses or supporting projects such as clean water and solar energy initiatives are examples of such investments.

Many millennials, however, remain unaware of impact investment opportunities available to them. Many may assume such investments require them to sacrifice financial returns in exchange for good intentions, yielding lower returns than traditional alternatives. However, this misconception can be corrected through education about impact investing and showing investors its potential financial and social benefits; research conducted by GIIN Investors Council shows most impact investors pursue market-beating financial returns while it’s possible to achieve significant impacts with smaller amounts of capital.

Big Investment Banks’ Social Impact Bonds

Socially and sustainably-linked bonds offer banks an exciting new avenue for expanding their businesses while creating value in society. A bank that helps launch and manage an impact bond could gain access to a whole new pool of investors while solving social problems while strengthening its own brand image.

An impact bond allows private investors to provide upfront capital for social interventions provided by service providers (typically nonprofit organizations), in exchange for payment based on predetermined social outcomes. An outcome funder, typically government or commissioning bodies, reimburses these investors only if their interventions achieve the desired social results and meet predefined parameters.

For this investment to succeed, service providers must have the ability to identify quantitative and objective outcome metrics. While this can be challenging, it should not lead to output-based payments which may prove misleading if not carefully managed.

The Next Generation of Investors

As interest in impact investing grows, investors will experience more options from various providers. Each investor must carefully assess each investment option against their unique needs and objectives; some options may have higher financial risks than traditional investments.

As well as seeking financial returns, many investors also aim to support causes that align with their values – this is particularly prevalent among millennials and Gen Z investors, who care deeply about climate change mitigation, advocating for equitable practices, and working to make an impactful difference in society.

Multiple large institutions are investing catalytic capital to fill gaps left by conventional markets, unlocking additional funding for mission-driven intermediaries and enterprises. This new impact investment model seeks to solve big problems while producing significant social benefits by working alongside communities towards key institutional priorities.

Greenwashing

As more investors embrace impact investing, there is the risk of greenwashing; when marketing claims of companies are false or exaggerated to attract investment capital. This practice undermines the legitimacy of impact investing.

Experienced financial professionals can protect investors by reviewing an investment’s benefits, significance and effort prior to making a recommendation. In particular, they will look out for red flags such as vague language in copy, award claims that don’t align with reality and scientific terminology or buzzwords that might mask lack of credibility.

Investors can support specific social causes by investing in nonprofit loan funds with specific missions, like reducing child malnutrition or expanding small business lending. But without proper management, investors may end up creating portfolios more reflective of traditional stock market values than their desired values – something Muers from BSC says can be reduced with some standardisation, though Hailey from responsAbility Investments notes standards should remain high-level as each investor may focus on different impact themes.