More than ever, sustainable investing is a topic of conversation – in the investment world, development pioneers, and politics. It is clear we can’t keep going ‘business as usual,’ but what to do instead is a more contested issue. What is the best sustainable investment strategy that will save the future of our planet? That will help achieve gender equality? That will put an end to world hunger and the water crisis? At FLIT Invest, we believe that impact investing is the most sustainable and effective investment strategy that generates positive measurable impact while growing your wealth. This article is the first of a 3-part series where we will introduce the ins and outs of impact investing. We will cover the essentials of impact investing, how it differs from other strategies, and how FLIT Invest implements this investment approach in our app. Understanding your options is essential to making an informed choice and making the greatest impact when you vote with your dollars.
A History of Impact Investing
Impact investing is a relatively new concept compared to other sustainable investing strategies. The term was coined in 2007 during the Rockefeller Foundation’s Bellagio Conference in Italy by stakeholders and leaders in finance, philanthropy, and development. Impact investing joins charity and economics to form an investment strategy that does good in the world, on purpose, and makes money. They created an early framework to build a worldwide social and environmental impact investing industry.
Even before 2007, impact investing was being practiced. BlueOrchard, founded in 2001, a UN Initiative, was the first commercial manager of microfinance debt investments worldwide. The company became a leading global impact investment manager and recently celebrated its 20th Anniversary! Another great example would be the Omidyar Network, which in 2004 launched a “philanthropic investment firm” that blended philanthropy and investment. Since then, impact investing has grown, and the Global Impact Investing Network (GIIN) launched to promote effective impact investing. GIIN developed best practices for impact reporting and impact investing and serves as a reference point for all impact investors.
Impact investing is continuing to grow, not just in the more sustainably minded banks. Today, practically every big investment firm has an impact investing arm, whether internal or by acquiring an independent impact investing boutique. Governments are also supporting impact investing. It is clear that important people in important places are backing impact investing. Despite rhetoric against sustainable investing in recent years, the impact investing market hit $1 trillion in 2022, according to the Global Impact Investing Network (GIIN). To us, that sounds like a lot of dollars making a lot of difference!
What is Impact Investing?
Let’s talk definitions. What actually is impact investing? According to GIIN, impact investments are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” The emphasis on intention and measurement is the key takeaway that distinguishes impact investing from other sustainable investing or even philanthropy. In the next section, we explain what each element means for impact investing.
Impact Investing: Intentional and Measurable
INTENTIONAL: Investments must make a positive social or environmental impact and make good financial returns. That is, you are doing good with your money on purpose and intending to make money back. Impact investors can choose which investment themes they invest in and select multiple (for example, at FLIT Invest we offer these 6). Still, investment themes are ultimately chosen to impact the world positively. Many impact investing funds use the UN SDGs as a framework or the GIIN’s IRIS platform to capture their investments’ social and environmental impacts.
MEASURABLE: The social and environmental impact of investments must be measurable. Measurability indicates intention but also ensures follow-through from the companies in your portfolio. If a Clean Water company says it’s making an impact, tell us how many billions of gallons, please! If a company is offering Climate Solutions to reduce greenhouse gas emissions, tell us how many GHG emissions were avoided thanks to their business. Measurability is accountability!
The Two Sides of Impact Investing
So given impact investing is about the impact and financial return, you can take two paths within impact investing. You can prioritize impact or profit while still satisfying the principles of impact investing. The choice is up to you; there is room to be finance-first without being finance-only and impact-first without being impact-only. Both approaches are valid since pursuing financial returns alone would be considered traditional investing, while seeking impact alone would be regarded as conventional philanthropy. See below a helpful diagram showing the various sustainable investing strategies and how they balance finance–impact.
Whether you’re finance-first, impact-first, or somewhere between, impact investing is the strategy FLIT Invest believes will change the world. We believe that impact investing is the most sustainable investing strategy available. To read more about the sustainable investing space, you can read our article What is Sustainable Investing?
Is Impact Investing Still Growing?
Looking at the big numbers for sure! The impact investing market provides a lucrative opportunity to make an impact and yield returns. From 2019 to 2022, the impact investing market has grown from $500billion to $1 trillion. The impact investing actors are not only limited to traditional investors, but new actors such as NGOs, religious institutions, pension funds, and individual investors are coming onto the scene. But wait, there’s more! The full market potential for impact investing is yet to be reached. According to the IFC, the impact investing market for private institutions and households in 2018 has a potential of $26.5 trillion. This is an exciting space to be in. Additionally, impact investments can perform as successfully as the rest of the market, and for more convincing, you can read GIIN’s 2020 Annual Impact Investor Survey.
The growth of impact investing is promising for a young discipline, but challenges remain as options are still limited compared to traditional investing or philanthropy. It can be hard to find options marketed truthfully or have a low enough account minimum for the everyday person. Investing should not just be for the ‘finance bros’ or ultra-wealthy – it should be for conscious consumers, financial activists, students trying to save, and young professionals thinking about their future. It’s time to democratize investing and make it accessible for all.
Footnote 1: Content is for informational and educational purposes only. Any views, strategies or products discussed may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. The information contained herein should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund or ETF before investing.