Myths and Misconceptions on Impact Investment.

January 13, 2017

 

Myths & misconceptions #1: Impact investing requires giving up financial returns

 

The first, and most frequent, misunderstanding is that you have to sacrifice returns to have an impact.

Consider institutional investors active in impact investing who, as part of the Global Impact Investing Network (GIIN), annually complete a member survey

 

. For those investors targeting market rate returns, they reported 9% of their investments were underperforming, whereas 66% were in line with expectations, and 25% were outperforming.

There are, however, investments that explicitly target lower returns than other comparable investments. Although this is not an attribute of all impact investments, in these cases, it is the investor’s choice whether or not they choose to invest.

 

Myths & misconceptions #2: Impact investing is a separate asset class or allocation

 

Impact investments are fundamentally investments but are not themselves a distinct asset class. As options for impact investments exist across most asset classes, an investor would not need to allocate a separate portion of their portfolio to impact investments. Rather, they would look at how many of their investments include impact considerations in their investment approach.

To provide an example, an investor would not have a portfolio made up of 40% equity, 40% fixed income, and 20% impact investments. Why not? Imagine if the investor wanted the 20% of impact investments to be in ‘green bonds’, which are fixed income investments where the proceeds are applied specifically to environmental projects. Because green bonds are fundamentally fixed income investments, the 20% impact investment is really an additional 20% allocation to the existing debt allocation in the portfolio.

While today it may not always be possible for every investment in an investor’s portfolio to be an impact investment, we expect this will be feasible over time. Already, some leading impact investors in a network called ‘Toniic’ have deployed $1.1 billion into what they call 100% ‘Impact Portfolios’, where they have found investments they consider impactful across all asset classes in their portfolios.

 

Myths & misconceptions #3: Impact investing is private equity investing in early stage businesses

 

The most visible and recognisable form of impact investing has been providing financing to early stage businesses addressing social and environmental challenges, often in developing countries. These are critical and ambitious organisations that often lead the innovation around finding solutions with commercial business models.

However, they are not the only impact investment option or way to invest for impact. For example, we believe that it is possible to incorporate impact in investment decision-making when selecting publicly-listed companies which issue stocks and bonds. These organisations generate an impact, which is often significant, in how they operate and in the goods/services they provide.

We recognise that investing in these more established organisations may not have the same additional effect as funding a start-up, and it may not be as easy to directly measure the impact of these investments. However, for many investors, these investments are accessible or appropriate for their circumstances, and can be made in line with the intention to invest for impact.

Additionally, investing in listed companies with this intention in mind can, in itself, be catalytic insofar as it generates behavioural change amongst businesses, driving them to think about the overall outcomes of their operations beyond the bottom line, the impact they have in the environment and communities, and the role they may want to have in society. This presents an opportunity for positive change and comparable financial returns.

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