Why it pays to invest sustainably
Baillie Gifford has become the latest investment manager to enter the world of impact investing.
The firm’s Positive Change Fund will invest in companies that put “a more sustainable and inclusive world” at the heart of their business.
“We believe that businesses and innovations have the potential to make tremendous improvements to people’s lives,” said Lee Qian, Baillie Gifford Positive Change fund manager.
“We further believe companies that are seeking to effect positive social and environmental change will see rising demand for their products and services and are therefore naturally growth companies."
Impact investing is the investment into companies, organisations and funds that purposefully deliver financial as well as social and environmental returns, together known as ‘blended returns’.
Morgan Stanley raised USD$125m from its first global impact fund back in May, but what are the benefits of impact investing?
Does impact investing actually deliver a financial return?
Research has found that small funds of less than USD$100 million launched from 1998 to 2010 outperformed similar sized funds in the comparative universe, with an internal rate of return of 9.5% compared to 4.5%. 60% of respondents in the Global Impact Investing Network (GIIN) 2016 Annual Impact Investing Survey stated that they principally target risk-adjusted, market rate returns.
According to the GIIN 2016 Annual Impact Investing Survey, 90% of impact investors reported that financial return on their investments met or exceeded expectation and 99% reported impact return met or exceeded their expectations. Figure 1 shows the performance of investments relative to expectations.
How big is the impact investing sector?
The impact investing market is still developing, but it is gaining momentum rapidly. In 2013, it was estimated that USD$46 billion of capital was allocated to impact investing.
According to the GIIN 2016 Survey USD$77.4 billion of capital was committed to impact investing in 2015. The Monitor Institute predicted that the impact investing market could reach USD$500bn by 2020, representing approximately 1% of the world’s total assets under management.
What sectors attract most investment?
The majority of impact investment funds target several areas, but financial inclusion is the most actively pursued sector. The other popular sectors include energy, housing and agriculture.
Certain sectors are more suited to impact investing, primarily those involving tangible assets and stable, long-term, predictable income flows.
What’s the history of impact investing?
The term ‘impact investing’ was officially coined approximately nine years ago. Its history stems from investors actively choosing not to invest in companies undertaking negative practices as well as the rise in corporate social responsibility.
The approach of blended returns is not new. It can be traced back as early as the mid-19th century when model dwelling companies (MDCs) were established in England to address the poor housing conditions of the working classes. By 1875, tens of thousands of housing units had been delivered by MDCs.
What’s the future of impact investing?
Impact investing has the scope to utilise private sector funding to address social and environmental issues, it could also play a pivotal role in the delivery of international targets such as the Sustainable Development Goals.