Impact investing requires access to the right asset managers and strategies that are focused on finding the optimal mix between doing good and financial returns.
Sustainability-themed investing, and the more targeted, intentional impact approach, are both gaining ground. This is because many investors realise our economic systems are reliant on social natural ecosystems that are in trouble. It also recognises that the financial world is indisputably interconnected with social and environmental pressures, and so always has explicit intentions and targets outcomes in “underserved” areas. These underserved areas refer to specific global challenges, such as meeting the needs of the “bottom billion”, or addressing critical environmental challenges, such as climate change, water scarcity or biodiversity.
Systemic risks like climate change and growing social inequality are making it increasingly vital for investors to embrace this approach to investing. Impact investing involves directing capital towards addressing the world’s most pressing problems while simultaneously securing targeted, risk-adjusted returns.
Although impact investing is not a brand new concept, it's now becoming more prevalent as portfolio managers progressively embrace the need for investor capital to generate a social and environmental impact while helping investors to achieve their financial goals.
The UN’s Sustainable Development Goals (SDGs), provide an overarching framework for investors to tackle global challenges and set priorities across all sustainable strategies. Many investors understand that the SDG goals cannot be achieved without impact, therefore it’s important that all parties understand the effects of our decisions and investments.
What are the elements of impact investing?
There are three elements to impact investing - intentionality, measurability and finance return. We outline these in more detail here. Addressing these three elements creates a potential for greater success of impacting investment strategies, but framing your approach through additional impact lenses may further enhance it. Some investors may believe they have to lower their expected rate of financial return to truly effect change in a particular area, however, for most investors this doesn’t have to be true.
By harnessing impact investing lenses, portfolio managers can identify the most compelling opportunities across a range of asset classes that have the potential to match or outperform traditional markets. Research by the Global Impact Investing Network (GIIN) has shown that more than 1,720 organisations managed US$715 billion in impact investing as of December 2019. Analysis of their performance showed:
were targeting risk-adjusted, market-rate returns
had performance experiences that were outperforming or in line with expectations
Key focuses within impact investing
Impactful products and servicesThese should be core to a business rather than on the periphery, and are designed to deliver outcomes that solve pressing problems for underserved stakeholders, including people and the environment.
Systems-thinkingThis approach recognises our reliance on social and environmental systems and their intrinsic links to one another. It aims to truly integrate sustainability into the decision-making process, for instance favouring solar panels or batteries designed for disassembly and refurbishment as part of a renewable energy strategy, to avoid resource waste and address second-order impacts.
Targeted outcomes and measurementDefining objectives that can be measured from the outset is central to impact investing. Investors should be able to describe what new benefits will result directly from the additional capital or investment provided.
Recognised sustainability frameworksUsing a common language to categorise investment approaches and issues, such as investible themes or topics, metrics, and targets and impact outcomes, helps create clear and consistent communication that is understood by all stakeholders.
A thematic approach to impact investing
Intention and goals
- Identify what the expectations are of the investment committee, organisation and stakeholders.
- Decide which of the UN SDGs you want to target.
- Identify the intention and resources that provide solutions to underserved and critical challenges
- Establish how exposed your existing portfolio is to the impact investing themes you want to access.
- How much exposure does your portfolio have to the asset classes that might be used for gaining access to impact investing.
- Establish how you will report the impact outcomes of your investments.
- Identify whether investment in skills or technology will be needed to take advantage of modern reporting frameworks and tools.
This content on this website is provided for informational purposes only and should not be taken as advice or recommendation to buy or sell any specific investment product or services, including Mercer’s investment management services, or to enter into any portfolio management mandate with Mercer.
Any investment carries inherent risks and you should carefully consider your own investment objectives, financial situation, and needs before making any investment decision.
Past performance is not an indication of future performance.