As people search for ways to have impact with their capital, more investors are looking beyond traditional investment approaches that prioritize financial returns above all else. From ESG and sustainable investing, the shift we’ve been seeing lately is toward impact investing, where stakeholders can align their investments with their values and support impactful change on issues that matter to them – while still aiming for competitive returns relative to the market.
While the concept of impact investing isn’t exactly new¹, demand for impact investments has been steadily rising² over the past two decades. Here’s why.
I’ve heard of sustainable and ESG investing, but what is impact investing?
Impact investments are investments in financial products such as equities or bonds made with the goal of generating specific, measurable positive social or environmental effects in addition to financial gains.
Impact investing can target both emerging and developing markets in a variety of asset classes – from stocks to bonds – with the goal of addressing the world’s most pressing challenges in any number of sectors, including housing, education, sustainable agriculture, clean tech³ like renewable energy, conservation and human rights.
Although it’s often conflated with ESG, or Environmental, Social, Governance investing⁴, impact investing goes beyond socially responsible investing (SRI), whereas ESG is a framework that measures the overall impact a company holds across its environmental responsibilities, social impact and governance structures as they relate to the profitability of that company.
Whereas ESG typically screens out companies with a negative impact, impact investing emphasizes companies that are making positive change in the world.
Why investors are focused on impact investments
Impact investing has recently seen a boost in popularity. In 2020, impact investments with social and environmental impact had a breakout performance year⁵. Figures from the Global Impact Investing Network show that impact investing grew from⁶ $500 billion in 2018 to $700 billion by 2020. By 2022, the size of the worldwide impact investing market⁷ reached $1.164 trillion.
The momentum continues today as more women⁸ and younger investors⁹ show an interest in investing not only for financial gain, but also to leave the world a better place for future generations. Indeed, the global impact investing market is now estimated to surpass $1.1 trillion¹⁰ as impact investments are recognized to be a key method in addressing global issues and crises.
For investors, the strategy offers an opportunity to have a positive and forward-looking stake in the changes required to ensure a more sustainable future. By investing for impact, investors can grow their capital while working to build a better world – and time is of the essence.
In 2015, the United Nations set 17 Sustainable Development Goals (SDGs) intended to prompt action on urgent global issues by 2030. As it stands, the funding gap required to achieve those SDGs is an estimated $4.2 trillion¹¹ USD in 2022. Now is the time for investors to make meaningful contributions by allocating their resources to companies that are finding solutions to big challenges.
Capital management with a track record
First coined as a term¹² in 2007 by the Rockefeller Foundation, impact investing started as a concept focused on philanthropy and charity. Since then, it has had to battle the misconception that in order to do good, investors must sacrifice returns. As a result, instead of pushing for innovation, many investors have doubled down on portfolios full of exploitative old-standbys, like greenhouse gas polluters.
Still other investors have shied away from impact investing because of concerns with greenwashing and impact washing – where companies misrepresent or overstate the positive impacts of their business. In fact, greenwashing is a pressing issue, with 60 percent of respondents to a recent survey identifying it as a threat¹³ to impact investing.
Given those risks, it’s important to choose a financial services team with a track record. Genus Capital Management has been a trusted asset management firm in Canada for more than a quarter century. In fact, Genus was one of the first firms in Canada to have a High Impact Equity Fund that incorporates publicly listed stocks.
Options for impact investing
Genus’ proven approach to investment and commitment to sustainability and impact is reflected in products like the Genus High Impact Equity Fund and the Genus Impact Investment Counsel.
Socially conscious investors will want to do their research before selecting a portfolio that will make a difference – and Genus takes the same approach. Genus portfolios undergo rigorous analytical screens before the data is interpreted by an experienced investment team, including Genus’ new Indigenous Conflicts and Gender Equality screens.
To circumvent greenwashing, impact investments are measured based on the percentage of revenues being generated from a company’s product or services that contribute to the UN’s SDGs¹⁴, like health and well-being, gender equality, affordable and clean energy, decent work and economic growth, sustainable cities, responsible consumption and production and industries, innovation and infrastructure.
Next, the data is optimized and the impact investment options are ranked on factors like profitability, company growth and stock price momentum. Impact portfolio funds are reevaluated and rebalanced every month.
The Net Impact Scoreᵀᴹ
But how much impact does a company truly have? Genus is the first investment firm in Canada to apply a Net Impact Score to all client portfolios.
The Net Impact Score is a calculation that tells the whole story of an investment’s impact, providing a holistic view that helps the investor weigh both the destructive and beneficial nature of their investments in one metric. This way, in a given portfolio, an investment in renewable energy to reduce carbon emissions won’t be negated by a simultaneous investment in a different company that deals in coal.
For all the anxiety brought by living in a changing climate, investors have a powerful opportunity to shape what kind of world we leave behind through impact investments. As the saying goes, money talks – ask yourself what your portfolio is saying.
Interested in exploring impact investing strategies that match your values and financial goals? Contact a Genus advisor to learn more.
References
Lumberg, J. (2022) A brief history of impact investing, Investopedia. Available at: https://www.investopedia.com/news/history-impact-investing/ (Accessed: 18 July 2023).
- Laker, B. (2023) Demand for impact investing is rising. here’s why, Forbes. Available at: https://www.forbes.com/sites/benjaminlaker/2022/11/17/demand-for-impact-investing-is-rising-heres-why/?sh=58e91b20285f (Accessed: 18 July 2023).
- (2023) The case for Clean Energy and impact investing in an energy market upswing, Genus. Available at: https://genuscap.com/the-case-for-clean-energy-and-impact-investing-in-an-energy-market-upswing/ (Accessed: 18 July 2023).
- (2023) What is ESG investing, and how does it factor into your sustainable investing strategy?, Genus. Available at: https://genuscap.com/what-is-esg-how-does-it-factor-into-your-sustainable-investing-strategy/ (Accessed: 18 July 2023).
- Investing for impact: The global impact investing market 2020 (no date) Home. Available at: https://www.ifc.org/en/insights-reports/2021/impact-investing-market-2020 (Accessed: 18 July 2023).
- Macintyre, F. (2022) Impact investing is driving real economic returns and Positive Change, The CEO Magazine. Available at: https://www.theceomagazine.com/opinion/impact-investing/ (Accessed: 18 July 2023).
- Block, F. (2022) Global Impact Investments surpass $1 trillion for the first time, Barron’s. Available at: https://www.barrons.com/articles/global-impact-investments-surpass-1-trillion-for-the-first-time-01665605984 (Accessed: 18 August 2023).
- (2022) How women are driving growth in impact investing, Genus. Available at: https://genuscap.com/how-women-are-driving-growth-in-impact-investing/ (Accessed: 18 July 2023).
- Suozzi, C. (2022) The year ahead: Impact investing and philanthropy in 2022, Rockefeller Philanthropy Advisors. Available at: https://www.rockpa.org/the-year-ahead-impact-investing-and-philanthropy-in-2022/ (Accessed: 18 July 2023).
- GIINsight: Sizing the impact investing market 2022 (no date) The GIIN. Available at: https://thegiin.org/research/publication/impact-investing-market-size-2022/ (Accessed: 03 August 2023).
- GIINsight: Sizing the impact investing market 2022 (no date) The GIIN. Available at: https://s3.amazonaws.com/giin-web-assets/giin/assets/publication/research/2022-market-sizing-report-final.pdf (Accessed: 18 July 2023).
- Peralta, J. (2018) Bringing scale to the impact investing industry, The Rockefeller Foundation. Available at: https://www.rockefellerfoundation.org/blog/bringing-scale-impact-investing-industry/ (Accessed: 18 July 2023).
- Avery, C. (2023) Greenwashing biggest threat to impact investing, say lps, New Private Markets. Available at: https://www.newprivatemarkets.com/greenwashing-biggest-threat-to-impact-investing-say-lps/ (Accessed: 18 July 2023).
- (2022a) How our impact portfolios align with the United Nations’ Sustainable Development Goals, Genus. Available at: https://genuscap.com/how-our-impact-portfolios-align-with-un-sdgs/ (Accessed: 18 July 2023).
