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Are you looking for your investments to have a more positive impact on the environment and wider society? Impact investing is a style of investing which attempts to strike a balance between the two. Interest in impact investing has risen markedly in recent years, from a fringe strategy a few decades ago to a more mainstream approach worth $1.2 trillion at the end of 2021. Below, our team at Cedar House offers a short guide to impact investing in 2023, some different forms it can take and ideas to build a portfolio based on its principles. We hope this content is informative. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
What is impact investing?
Impact investing is when an investor buys shares or bonds from a company, organisation or fund which seeks to generate both a financial return and a measurable, positive impact on the environment. These investments can involve a wide range of risk levels – from “low” to “high” – and span many different asset classes including “growth” stocks, fixed income, venture capital and private equity. For instance, an investor could choose to buy shares in companies which innovative in the area of renewable energy – hoping to eventually sell them and generate a capital gain. Alternatively, an investor might invest in a socially responsible housing organisation and receive a regular fixed income.
The rising popularity of impact investing can be explained by many factors. Governments are increasingly facing political pressure to close the $4.3 trillion “financing gap” before the 2030 Sustainable Development Goals are achieved. Investors are also becoming more conscious of the impact of their portfolios on the wider world. Those who invest in “oil giants” and other carbon-intensive businesses, for instance, may find themselves needing to justify the holding to certain acquaintances (or keep it quiet). Moreover, there are now more impact investment opportunities than ever before in 2023. Indeed, ESG-focused international investment is set to grow to US$33.9 trillion by 2026 – up from US$18.4 trillion in 2021. Whereas before investors needed to look quite hard to find viable impact investments, today they are spoiled for choice.
Different types of impact investing
There are many different terms used to describe investments which seek to make a positive difference to the world. Sometimes impact investing is used interchangeably with ESG investing (environment, society and governance), ethical investing, socially responsible investing and green investing. However, impact investing is arguably unique in that it seeks to demonstrate a measurable impact on the world – as well as a measurable return. For instance, a “green” investment could describe a company which produces wind turbines. Yet an impact investment might describe a company in a more traditional industry (e.g. finance) which engages in regular “impact projects” – such as building clean water supply facilities in poor rural communities. The success or failure of these projects can be measured using metrics such as time to completion and how many more people have access to clean, drinkable water by the end date.
Impact investing can be approached in many ways. Firstly, opportunities can be classed by sector or industry – e.g. healthcare, education, clean/renewable energy and agriculture. An investor might build positions, to some degree, in some or all of these areas depending on their risk appetite, investment horizon, investment strategy, diversification needs and portfolio goals. Secondly, investors should consider how much of their portfolio they want dedicated to impact investments. Certain people might want to opt for a “screening” approach where their portfolio excludes any companies which receive revenue from fossil fuels. Others might prefer a more “inclusionary” approach where the top ESG performers in a given industry (e.g. oil & gas) are invested in (as a “reward” for setting an example to their peers).
Key considerations for impact investing
At present, there is no international regulation or “standard” that investment funds must meet before they are allowed to assign the label: “ESG” or “impact” investment. Therefore, investors can sometimes invest in funds which they believe align with their values, yet the underlying investments do not do this. By working with a financial adviser, however, you can improve your ability to “look under the hood” of different impact funds and choose candidates which not only offer promising returns, but also best reflect your values.
Think carefully about the key issue(s) that you care about. For instance, are you most keen to invest in companies which protect the environment? Or, are you more interested in causes like gender equality in board rooms and other key decision-making roles? Do you want to invest in better personal data protection or causes which help to fight corruption? Knowing your personal values will help you focus on a specific set of investments out of the 1,000s of possibilities you can choose from impact investments.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk