Key Takeaways
- Many end investors back impact investing in principle, but few have moved to action
- UK regulation is driving impact investing up the agenda
- An expert view: impact investors can achieve commercial financial returns at scale
More than half (56%) of the UK population is interested in impact investing, but only 9% have done so. This is according to government research into why the country is failing to fulfil its potential as a force for financial good¹.
Impact investing is a sub-set of the responsible investment stable, but it is a distinct discipline of its own and aims to proactively change social and environmental behaviour through investment.
The Global Impact Investors Network (GIIN) defines impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
UK regulation is driving responsible and impact investing up the agenda, and more institutions are expected to, at the very least, have a formal policy on this area. For retail investors, meanwhile, the EU is proposing that advisers incorporate ESG considerations into client suitability assessments.
That is not to say advisers must encourage clients to invest in specific responsible strategies, but to ensure they have discussed ESG preferences as part of a client fact find. The issue for advisers may be in reassuring investors that impact investing can enhance rather than sacrifice returns.
GIIN’s 2019 Impact Investor survey found ‘portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole²’.
Meanwhile Philippe Le Houérou, International Finance Corporation (IFC) CEO, says: “There is increasingly solid evidence that impact investors can achieve commercial financial returns at scale, and in a variety of settings. For instance, on average, IFC’s realised equity investments have delivered returns in line or better than the MSCI Emerging Market Index in vintage years from 1988 to 2016³.”
Advisers are faced with a huge range of perspectives on responsible investment which will inform their level of inclusion and expectation in this sector. Incorporating responsible investing into a portfolio will therefore take many forms and may range from screening out particular industries or sectors for ethical reasons, to engaging with companies to drive positive behaviour, and investing in readymade strategies.
- https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/659079/Executive_Summary_-_Growing_a_Culture_of_Social_Impact_Investing_in_the_UK.pdf
- https://thegiin.org/assets/GIIN_2019%20Annual%20Impact%20Investor%20Survey_webfile.pdf – Approximately 15% of respondents indicated meeting or exceeding both their impact and financial performance expectations, and just 2% and 9% of respondents, respectively, reported underperforming relative to their impact and financial performance expectations.
- https://www.ifc.org/wps/wcm/connect/66e30dce-0cdd-4490-93e4-d5f895c5e3fc/The-Promise-of-Impact-Investing.pdf?MOD=AJPERES
Actions to consider
- Question your product providers. Ensure you are clear on the responsible investment options on offer and that the providers themselves have a robust ESG investment approach.
- Be open and responsive to the growing number of clients who will come to view responsible investing as not just a priority, but as the norm.
