Standard Life Investments

Impact investing – from niche to mainstream

What is impact investing and why is it growing in importance in the investment industry?

20 October 2016

Making money, while making a difference

Is it possible to address the world's many social and environmental challenges, while still making a financial return? It is certainly a lofty and noble ambition. But there is one possible solution that is growing in popularity - impact investing.

What is impact investing?

It involves channelling capital into listed entities that are attractive from a financial position, but that also have a strategy that will deliver measurable social and environmental returns.

Such an investment could include buying shares in companies providing renewable energy solutions or building affordable housing. It can also involve purchasing bonds that have a specific environmental or social purpose, such as financing a solar farm.

This is a rapidly growing industry: according to the Global Impact Investing Network, there was around $60 billion made in impact investments globally in 2015. This figure looks set to rise.

A measure success

Two of the key facets of impact investing are that it must be intentional and measurable. A company that simply reduces its carbon footprint or becomes more transparent about its activities would not be going above and beyond the call of duty in delivering impact. A true impact fund must actively seek to address a particular social or environmental concern in a quantifiable way.

However, while measuring financial returns is fairly straightforward, the science of quantifying positive environmental or social impact is more difficult. Nonetheless, accurate measurement will be necessary to fully legitimise impact investing. There are already several frameworks in place.

In January 2016, the UN published its Sustainable Development Goals (SDG), a universal set of 17 principles that members of the UN are expected to use as the basis for all polices in the next 15 years. Within these goals, there are 169 targets. These provide detailed measures against which to evaluate a company's impact criteria. So, for example, a business's commitment to sustainable energy can be gauged against factors such as level of access to emerging markets, clean energy practices and efficiency measures.

Of course, this is not a definitive solution, but is certainly a giant leap in the right direction.

Investing in the future

The outlook for impact investing is encouraging. According to JP Morgan, impact investing will reach $1 trillion by 2020. This is likely to be driven by Millennials (13-36 year olds) - a generation increasingly looking for investment vehicles that 'make a difference to the world.' Indeed, a recent survey by Morgan Stanley found Millennials were twice as likely to invest in portfolios or individual companies that seek to have positive environmental or social impacts.

Going forward, as more capital and expertise enter the market we will no doubt see a wider range of investment vehicles emerge, as well as more diverse impact targets. Importantly, impact funds will slowly build track records, which will help demonstrate the benefits of this type of investment and cement its place as the future of ethical investing.