The challenges climate change and social inequalities present before humanity often seem unsurmountable, especially from a modern perspective. People often feel that we are living in biblical end times and the future has never seemed grimmer, despite all the technological advances we have made. However, the solution that can go a long way into resolving many of the pressing issues we face today exists. It is called impact investing and is combining good old capitalist greed with the social awareness we need. Until recently, it was reserved for people who weren’t considered mainstream investors, but lately, that has changed. Today, the list of 50 biggest impact investors are some of the most important names in the financial world. As impact investment proves that it can scale up, we expect to see more big-name investors considering it. Hopefully, some of the trends that shape impact investment will help convince them, for all our sakes.
What is Impact Investing?
Impact investing is a term that has been popularized in recent years, but there are still a lot of misunderstandings about its true meaning. In short, it represents a form of investing that tries to achieve not only profit but also sustainability and accountability. The financial return is just one of its goals, the others being positive environmental and social changes. The impact of these changes must be measurable and sustainable to qualify for inclusion. One of the biggest misconceptions about impact investing is that is limited to just several sectors, like green energy or agriculture. Nothing can be further from the truth. In fact, you would be hard-pressed to find an industry that couldn’t benefit from it. Impact investors have portfolios that are as diverse as traditional ones.
When first coined, impact investment was considered a fringe movement that will never gain any traction. People who dealt with were considered idealists and the whole idea was written off as hopeless. Today, the situation is changing dramatically. It turned out that those idealists were right all along and lucrative environmentally friendly stocks are now present on all markets, from New York to Tokyo. This trend will only accelerate in near future, leading to full acceptance of impact investment as a mainstream form of investing. The growth of the market and increased accessibility will also play major roles in this process. In time, it will become dominant and the only socially acceptable form of investing.
The measurement of impact investing has always been present, but in recent years, as institutional investors join the fray, it will become absolutely crucial. The ability to correctly gauge just what the investment will accomplish in terms of social and environmental impact will determine the ability of projects to attract investment. A standardized metric like The Global Impact Investing Network’s (GIIN) IRIS will become a norm, as more and more investors adopt them. It allows them to have a comparison point between various investments and is a very valuable tool for them.
One thing that kept institutional investors away from conscious investing is that it lacked maturity. Often, the projects that needed financing were less based in reality than on the hopes and dreams of their creators. Early investors were made of the same cloth, which led to some spectacular disasters. It was no wonder that Wall Street people looked at them with disdain. As time passed, impact investing matured somewhat and is now considered a viable investment strategy. The profit margins are often smaller compared to traditional investing, but that is only to be expected, considering the nature of projects.
The fact that Generation Z and Millennials are becoming the biggest generational cohorts also plays a prominent part in impact investing. Unlike their parents and grandparents, they insist on purpose and fulfillment over financial security. But impact investment is offering them a chance to have both. And make no mistake, they are taking it. For instance, 64% of Generation Z wants to contribute to something important in their lifetime. With Millennials, this is even more pronounced, as 94% of them want to use their skills to better the world. It is no wonder that they are embracing impact investing with both hands. As more and more of them take over the CEO positions from older folks, more funds will be directed to impact investments from all sources.
The Future of Impact Investing
As climate changes continue to take their toll on humanity with no signs of backing down any time soon, the importance of impact investing continues to grow by leaps and bounds. Its ability to bring vital social and environmental projects to life is what sets it apart from traditional investing. More and more investors are realizing the direction impact invested is heading and are trying to add at least some impact investing positions to their portfolios. The Covid-19 pandemic has only accentuated the need for it and once the markets stabilize, we expect to see the massive growth of these types of investments all over the globe, not just in developed countries.