When it comes to investing, financial returns and social considerations did not always go hand in hand. In fact, businesses went through a phase of prioritising profit maximisation at the expense of everything else, including the environment and community.
However, the pendulum is slowly swinging the other way as impact investments, which support businesses that consciously create a positive impact on the community, environment or both has become on-trend in the 21st century.
The segment has gained significant momentum as both an investment strategy and an approach to addressing pressing social and environmental challenges in the last decade, says the Global Impact Investing Network (GIIN) in its Sizing the Impact Investing Market report in April.
Defined as “investments made with the intention to generate positive, measurable, social and environmental impact alongside a financial return”, the global impact investing market is estimated to be worth US$502 billion, from just US$228 billion under management in 2017, GIIN points out. Impact investing is considered a subset of socially responsible investing.
The initial impact investing framework began taking shape in the late 1990s and early 2000s when private investors — led prominently by large family-run entities — wanted a clear distinction between investment activities and philanthropic giving.
It was also when investing based on environmental, social and governance (ESG) principles entered the mainstream as assets owners and managers opined that ESG factors were beneficial when it came to risk mitigation. Prior to that, many early strategies that were deemed ethical and virtuous were in accordance with investors’ faith or moral values.
Simultaneously, the world’s financial engines were starting to choke. In 2007, a downturn in the US housing market — caused by innovative structuring of subprime mortgages and novel securitisation strategies — sparked a financial crisis that spread to the rest of the world.
“The global financial crisis served as a wake-up call to many as it brought into focus the huge potential real-life costs of financial decisions that purely chase short-term profits. The timing of this awakening coincided with the establishment of the current ‘impact’ market as we know it,” says Stephanie Choi, a partner at Hong Kong-based Sustainable Finance Initiative (SFi).
The SFi platform is aimed at mobilising private capital for positive impact to accelerate the city’s transition to a sustainable financial hub.
While impact strategies embody the values of ESG and shares similarities with socially responsible investment approaches, asset managers go several steps further to deliver positive outcomes. To investors who are driven by purpose, finance is seen as a powerful tool to enact change and maximise impact.
At US$502 billion, impact assets make up only a fraction of the US$74.3 trillion in assets under management globally, but the growth has almost doubled since 2017.
One of the key inflection points that led to the development of the sector was the launch of the United Nations Principles for Responsible Investment (UN PRI) in 2006, a voluntary and aspirational set of investment principles for incorporating ESG issues into investment practices. Today, the UN PRI has more than 7,000 corporate signatories in 135 countries.