A case for impact investing
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.
Raising your impact ambition
A thematic approach to impact investing
Starting your impact investing journey
-
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
-
Current exposure
- 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.
-
Reporting capabilities
- 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.
References to Mercer shall be construed to include MMC Financial Company (Mercer) and/or its associated companies.
© 2023 MMC Financial Company. All rights reserved.
This content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without Mercer's prior written permission.
Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications.
This does not constitute an offer to purchase or sell any securities.
The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed.
This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Mercer provides recommendations based on the particular client's circumstances, investment objectives and needs. As such, investment results will vary and actual results may differ materially.
Past performance is no guarantee of future results. The value of investments can go down as well as up, and you may not get back the amount you have invested. Investments denominated in a foreign currency will fluctuate with the value of the currency. Certain investments, such as securities issued by small capitalization, foreign and emerging market issuers, real property, and illiquid, leveraged or high-yield funds, carry additional risks that should be considered before choosing an investment manager or making an investment decision.
Information contained herein may have been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission or inaccuracy in the data supplied by any third party.
For the most recent approved ratings of an investment strategy, and a fuller explanation of their meanings, contact your Mercer representative.
Mercer universes: Mercer’s universes are intended to provide collective samples of strategies that best allow for robust peer group comparisons over a chosen timeframe. Mercer does not assert that the peer groups are wholly representative of and applicable to all strategies available to investors.
Please see the following link for information on investment management index definitions.
Not all services mentioned are available in all jurisdictions. Please contact your Mercer representative for more information.
In the Kingdom of Saudi Arabia, Mercer’s Investment Services are delivered by MMC Financial Company (“MMCFC”). MMCFC is regulated by the Capital Market Authority (CMA), License No. 20-22238. MMCFC is incorporated in the Kingdom of Saudi Arabia, Commercial License No. 431210240571.
For the conflict of interest statement of Mercer Investments, of which MMCFC is a part, contact your Mercer representative or see https://www.mercer.com/conflictsofinterest.