What should I expect to be invested in as an impact investor?
A guide to impact investing
The term ‘impact investing’ first came to prominence in 2007 and, since then, it’s become a popular investment strategy for the environmentally and socially conscious. Like traditional forms of investment, impact investing comes with return expectations. However, it also comes with an understanding that the companies invested in will drive measurable, positive change.
What is impact investing?
Impact investing is a sustainable investment strategy that focuses on investing in companies that are making a positive impact on the world, whilst making a return on investment. However, financial gains are not the only consideration for impact investors.
There are three key elements that distinguish impact investing from other types of sustainable investing. These are intentionality, additionality and measurability:
- Intentionality: The intention of an investor to generate a positive social or environmental impact alongside market performance.
- Additionality: The fulfilment of a good cause beyond the provision of private capital.
- Measurability: Providing accountability and transparency in the reporting of the financial, social and environmental performance of investments.
In other words, investments are made with an understanding that this will lead to positive and measurable social or environmental change. In this way, impact investing challenges the view that financial gains and philanthropic endeavours do not (or cannot) go hand in hand.
What companies can I expect to be invested in?
As an impact investor, you should expect to be invested in companies that are developing solutions to the world’s toughest environmental and social problems. Sustainability is extremely objective so, to keep everyone on the same page, many investors refer to the UN’s Sustainable Development Goals (SDGs). This is one way that we screen funds for our portfolio, which is a key part of our investment process at CIRCA5000.
The seventeen SDGs cover a range of issues that need tackling at present, including climate change, biodiversity and water quality (on the environmental side). On the social side, it covers things like education, health and equality.
As an impact investor, you should expect your portfolio to be made up of investments into companies that are actively contributing to help solve these problems.
Most importantly, look closely at how much the problem has improved: it should be available in figures.
It may be a measurable increase in the number of women who graduate from school or the amount of carbon emissions reduced; it could even be something like an increase in employment rates. If you think anything seems a bit unusual, do some more research and dig deeper to check whether the numbers stack up.
What returns should I expect from impact investing?
Impact investing is not charity and it’s not philanthropy: it’s cold, hard, profit-seeking investing – but with the condition that you only invest in companies that are making a positive social or environmental impact.
There are two main reasons why impact investing can offer positive returns on investment:
1: These companies are trying to do good and run their business sustainably – safeguarding them for future developments
When companies are operating sustainably, they’re better equipped to operate in a world that’s increasingly concerned with things like climate change or gender equality. Companies need to adapt to more regulations and meet investor expectations around environmental and social issues. The companies that are already ahead of the curve in these areas could have an advantage when it comes to securing their future growth and prosperity.
2: These companies are addressing issues that the world needs to solve – and they’re doing it at scale
The companies that do this well – often by developing or using new technologies – really are the enterprises of the future. And, while impact investing is still a relatively new area within the investment industry, the data from impact investing funds shows that investors don’t need to sacrifice on returns when investing in a sustainable way. In fact, impact investments have the potential to offer positive returns, both financially and for the planet.
Until recently, impact investing had only been available to institutions, experts and industry leaders. However, with the growth and development of apps like ours, individuals can now make sustainable investments that benefit people and the planet. If you’d like to find out more about our investment accounts, take a look at the FAQS on our support page.
The information provided above does not constitute financial advice. You should fully understand the products you intend to invest in before making an investment decision. As with all investing your capital is at risk.