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FAQ
What is impact investing?
Impact investing is an approach to investing that generates both financial returns and positive, measurable social or environmental impact. Impact investing goes beyond traditional methods that solely focus on financial gains and aims to make a positive difference on the world. This does not mean that impact investors forgo financial return compared to traditional investors. To the contrary, an increasing number of studies show that sustainable investing and impact investing can generate alpha.
Is impact investing profitable?
The goal of impact investing is to generate a financial return at or above market returns. Empirical evidence shows that there is no trade-off between return and impact. In fact, many investors have been hugely success with impact investment such as in renewable energy (First Solar), circular economy (Uber, AirBnB) or education (Stride). The highly successful VC investor Chris Sacca predicts that the next trillion $ company will be focused on climate change.
What’s the difference between impact investing and ESG?
Both approaches have the generation of financial return as their primary objective.
ESG (Environmental, Social, and Governance) is about companies seeking to avoid harm from ESG factors that could hurt their financial returns (single materiality). That’s why the term ESG risk is used a lot in ESG investing. ESG investing is agnostic of companies’ impact on the planet and society, focusing solely on maximizing shareholder value.
Impact investing also focuses on maximizing return, but requires at the same time that the capital invested (your money) will generate a tangible, positive effect on the planet and society. A company with a high impact score will score highly on both managing ESG risk for itself and on how it impacts the planet and society (double materiality).
Here’s a short short example to illustrate the difference. Imagine company T has its main production site in a very arid location. One of Company T’s ESG risks therefore is water supply. Company T solves this problem by entering into a long-term water supply contract with a local water utility, leaving a nearby town low on water supply. Having managed this ESG risk well, Company T will get a high ESG score on this particular ESG risk – even though it procures the water at the expense of the nearby population. When looking at this case through an impact lens, the company will not get as high a score because it fails on the principle of double materiality. Although it manages its ESG risk well, the impact lens will fail the company on its outside impact as its water procurement contract strains the surrounding population’s water supply.
Is impact investing popular?
Yes, impact investing is gaining in popularity. According to a comprehensive survey by Morgan Stanley, more than three quarters (77%) of global private investors are interested in sustainable investing. 57% say their interest increased in the last two years and 54% anticipate increasing their sustainable investments in the next year. Drivers behind this growing interest include new climate science findings and the performance of sustainable investments.
What are examples of impact investments?
Impact investments can be made through direct investments in purpose-driven businesses operating in industries, such as education, circular economy, renewable energy, water protection or biodiversity. Impact investing can be done through many different capital market instruments, such as stocks, ETFs, mutual funds, bonds, private investments and even real estate.
Why is proxy voting a crucial part of impact investing?
In 2023, hundreds of US companies included votes on hot-button issues, such as climate, diversity or worker rights, in their annual meetings. Yet, due to lack of awareness and context, only 11% of private shareholders voted their shares. As a shareholder, whether you own shares directly or through funds, you have the power to make your voice heard by voting your shares. You may be surprised. Boards do care what their shareholders think.