The key to choosing the best impact investing opportunities is to understand the concept properly to its core. For this, you also need an overview of history of impact investing. Here is a quick guide.
There’s been a buzz about the concept of impact investing in the last decade, which amplified after the Paris Agreement was held in 2015. If you’re new to the idea, you’re probably wondering what it is and why it is gaining immense popularity by the day.
Mainly, impact investing is when investors contribute their funds to socially or environmentally responsible causes. I know what you’re thinking. How is that different from philanthropy?
It’s simple, while philanthropy involves giving out your funds without any expectation, impact investment is quite the opposite. In this case, you’re pitching your money in with the intent of earning some revenue, along with benefiting society and the environment.
This makes it a win-win situation. But who thought of this concept? And how is it being implemented in the world today?
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History of Impact Investing: Things You Need to Know!
I’ve compiled the things you don’t know about the history of impact investing right here to give you all the information you need. So let’s get started.
It Goes Back to the 18th Century
The most prominent mistake investors make while formulating their impact investing strategies is taking it as a newly funded trend. Although the concept has gained exponential popularity and growth during the last few years, it’s not a new notion at all.
You’ll be surprised to know that impact investing first originated back in the 18th century.
You see, impact investing is not all about climate change and environmental issues. It takes into account everything that has a positive impact on humankind and the planet.
This includes everything from social equality to religious liberties, environmental issues, and ethical means of business.
That’s why the Methodist Church’s approach to avoid investments in commodities like alcohol, tobacco, or products related to gambling can be seen as one of the first efficient advancements towards impact investing.
After the Methodists, who refrained from investing in companies that worked against their religious beliefs, the Quakers enhanced the concept of impact investing further in 1898.
The group pledged to avoid investing its funds in warfare and the slave trade. They based their investments on their moral values, which is known today as the social and ethical quotient of impact investing.
Similarly, in 1928, another group from Boston created the first impact investing fund, similar to the ones we have today. This fund worked to invest their investors’ money into profitable ventures while avoiding companies involved in practices related to alcohol, tobacco, weapons, and the sex trade.
While all these operations were taken up on a small scale initially, they became more popular after the Vietnam War protests. Eventually, such investment opportunities aligning with the investor’s preferences and concerns about society became common.
Fast forward to the modern era; the concept has evolved under the umbrella of ESG trends.
Investor Habits Shaped the Impact Investing Concept
Naturally, investors’ behavior and preferences play a pivotal role in investment trends, and that’s what shaped the history of impact investing.
As several people succeeded in having their voice heard through their investment choices, many groups in the late 18th century followed suit, including several government organizations.
For example, the Community Reinvestment Act was put forward by Congress in 1977 to forbid unethical lending systems in low-income communities.
Similarly, the Chernobyl and the Three Mile Island nuclear disasters made investors more conscious about the repercussions of unsustainable technologies on the environment and climate. This led the US government to form the Sustainable Investment Forum in 1984, which plays a vital role in devising impact investment policies.
Another astonishing impact made by investors in the history of impact investing was the withdrawal of South African investments.
Attributing to the inequality and racism promoted by the South African Apartheid law, students at the Columbia University urged the University and several other businesses to end investments funding South African companies.
Consequently, Nelson Mandela and President FW de Klerk succeeded in developing a new constitution for South Africa in 1990, mainly because of the influence of impact investors on their cause.
The history of impact investing clearly shows the impact of investors’ habits and choices on the way society and governments operate today.
Impact Investing Has Gained Immense Popularity In The Last Decade
Although the history of impact investment is dotted with world-renowned events that helped shape the concept as we know it today, it only became prevalent on a global scale in the last decade.
Don’t take my word for it; let’s check out the relevant statistics that show the surge in impact investment trends in the last few years.
Green bonds, investment-grade bonds created by fund managers, saw a 78% increase in sales from 2016 to 2018.
Similarly, research from 2018 shows that more than $500 billion worth of impact investing assets are managed globally. If that sounds like a staggering amount, the figure rose to more than $700 billion in 2020, and it’s not slowing down anytime soon.
Another reason for the increasing popularity of impact investing is investor preferences in the modern world. A survey concerning influential investors found out that almost 67% of millennial investors want to build their portfolios upon impact investments only.
Besides that, 91% of investors already funding impact investing options state that they generated unexpectedly high financial returns from their investments. This amalgamation of profit and societal contribution works well with woke millennials trying to change global practices.
This ultimately means a projected rise in the popularity of impact investing. With investors looking beyond material returns from every investment fund, the concept is bound to rise from a niche-based option to the new norm of investing in this decade.
Millennials Have Put Impact Investing in a Whole New Light
Millennials are the most critical generation to play their part in the history of impact investing. You see, these are the kids who grew up to see the invasive social, ethical, and environmental practices deteriorating the world as they knew it.
Consequently, this generation has grown up with a drive and inbuilt motivation to move towards change.
Besides that, a recent report published by the Resolution Foundation shows that while previous generations have enjoyed higher living standards than their predecessors, the same cannot be said for millennials.
While Gen X made 30% higher revenue than baby boomers in their early 30s, millennials make around 4% lower than Gen X members today. Ultimately, this makes millennials question whether their investment trends are moving in the right direction.
Furthermore, living standards account for more than the basic annual income. That’s why modern investors prioritize the overall quality of life and the long-term repercussions of their investments apart from material financial gains.
Impact Investments Provide Market-Competitive Results
Throughout the history of impact investing, there have been instances where people have brushed the idea off, attributing it to the loss in material gains. However, that’s not the truth anymore.
If you’re targeting impact investing opportunities to diversify your portfolio, you don’t have to compromise on financial gains. If anything, looking at the current popularity of impact investment, investors will have to succumb under the trend to remain relevant in today’s world.
Recently, the Global Impact Investing Network took a survey that established that 55% of all impact investments bring higher results than expected./
Moreover, another research found that impact investing trends actually succeeded in outperforming other asset classes in 13 out of 20 scenarios.
Taking 2020 as an evident example, ethical funds have grown at a yearly average of 16.8%, which easily outperforms traditional investing methods that provided a 15% growth on average.
This means impact investing is already a strong competitor for other investment income streams when providing reliable returns.
Richard Eagling, a well-known investment advisor, states that the concept of sacrificing profits for ethical investments is becoming outdated with every passing year.
There Are Multiple Approaches to Impact Investing
Yes, an essential aspect of impact investing history is that it was never a focused, streamlined concept. Even today, impact investing entails multiple factors and follows various approaches.
Initially, when we spoke about the historical existence of impact investment, it was mainly treated as a religious or social cause at that time. Since then, the concept has come a long way and takes multiple aspects under its umbrella, such as the products, processes involved, and the impact on the planet.
For instance, it started by taking a double bottom line approach to investments. This meant investors would not only get financial returns, but they would also make a social impact according to their moral values.
In addition to that, another approach made the consequence a triple bottom line achievement by adding an environmental aspect into the discourse. This eventually led to terms like SRI, ESG, and impact investing dominating the responsible investment strata.
Mainly, SRI involves excluding companies and organizations that work against the investors’ moral values from the investment portfolio.
On the other hand, ESG handles the situation using three screening criteria, environmental, social, and governance. This gives investors three-step scrutiny to exclude the companies that promote irresponsible practices from any aspect.
Lastly, impact investing evolved into a notion that lets investors choose the businesses they want to fund based on their environmental, ethical, and governance practices. Instead of excluding companies, investors are deliberately adding investments that have taken steps to impact society positively into their portfolio.
There are Some Negative Aspects
An important thing you need to know about impact investing is that it’s not entirely whitewashed. With every industry that goes through an exponential growth rate, the impact investing sector has its faults.
Some investment vehicles advertise baseless aims to propagate sustainable practices, only to attract investors. This concept is also called ‘greenwashing.’
As more and more people move towards ethical investment vehicles, adopting ethical practices has become an advertising game for some companies to bring in investors rather than working on the principles.
Besides that, critics also argue that impact investing is a strategy reserved for the wealthy. And because it brings potentially high returns as well, it only makes the rich richer, using the ethical grounds as mere means to rise.
Impact Investing Still Has a Long Way to Go
The central aspect of the history of impact investing is that it is still being written. We are far from establishing the concept and adopting sustainable practices for good.
To bring the necessary change, we still face an enormous challenge of quantifying the ethical and responsible gains from every investment. Even the ESG criteria have not yet been standardized and only follow the percentages mandated by the companies conducting the screening process.
Measuring the impact by developing proper consensus can help put things into perspective and eliminate the negative practices carried out under the impact investing garb.
Until then, the best we can do as a society is conduct our due diligence on the investment funds and opportunities we choose. This will make sure the change we’re aiming for actually sees the light of day, until common means to collect reliable quantitative data are established globally.
So that is how the history of Impact Investing is all about. For additional knowledge, it is best if you also know about ESG and the importance of it.
Lastly, know the ESG Investing Trends this 2021 to keep you informed.