Investing to make a difference: impact investment

By Rebekah Swan

Driving social change through investment

A growing field of investment which is capturing the attention of mainstream investors is impact investing. In the past, responsible or ethical investing focused on avoiding investments that have a negative impact on society or our environment. Impact investing goes a step further by investing into organisations, projects or funds with the intention of generating measurable social and environmental outcomes, in addition to a financial return.

“In simple terms, impact investing is putting your money to work in a way that helps to achieve positive benefits for society.”

For many years, philanthropy and investing have been thought of as separate disciplines – one championing social change, the other financial gain. The idea that the two approaches could be integrated – in essence, delivering a financial return while doing good – is a relatively new concept.

Impact investing came about in response to a growing awareness that the challenges facing society are too large and complex to be solved by governments, philanthropy and not-for-profit organisations alone.  It is one of many approaches to responsible investing and sits at the philanthropic end of the spectrum, but is different from philanthropy because a financial return is expected. It is also different from mainstream finance because measurable social and environmental benefits are sought.

How does impact investing perform relative to other investment?

Many investors assume that this type of investment means they will make a lower financial return, or that returns are ‘sacrificed’ in order to have impact. Other investors reject the trade-off between social impact and financial return, and expect a market rate return while delivering the intended impact. Positive impact does not always mean lower returns, and in practice impact investing covers the spectrum – from below-market returns to market-beating performance.

For investors, impact investing provides greater choice and opportunities to put capital to use in ways that make a financial return and align with their values. It encompasses a diverse range of investment opportunities – for example, investment in community infrastructure, sustainable forestry, or clean technology – and a growing list of activities, including renewable energy, conservation, microfinance, and access to affordable housing and education. Each has a different balance of risk, return and social impact, as well as investor expectations.

Impact investing is here to stay and can be seen as a key driver for positive change. It challenges the long-held view that social and environmental issues should be addressed only by governments or philanthropy, and that market investments should focus exclusively on achieving financial returns. It has particular appeal for younger generations, such as millennials, who want to give back to society, and is a trend which is set to grow as these investors gain more influence in the market.

AMP Capital sponsored the first in-depth study on the state of impact investing in New Zealand which was conducted recently by the Responsible Investment Association Australasia in partnership with the University of Auckland. You can find out more about the findings and download the report in this recent blog post.