La Global Impact Investing Network estimates that more than $700 billion is now invested in the world's impact funds, which aim to make money for investors and have a positive impact on the world. But with so many myths floating around, it's worth separating fact from fiction before entering this market-beating space.
What is impact investments?
Impact investing is the type of investment that is made with the intention of generating a positive and measurable social and environmental impact along with a return benefit. Impact investing can be done in both emerging and developed markets, and aims for a range of returns depending on investors' strategic objectives.
Where to place impact investment. Source: The Reference
The growing impact investing market provides capital to address the world's toughest challenges in sectors such as sustainable agriculture, renewable energy, microfinance and affordable and accessible basic services, including housing, healthcare and education. Let's see what the 5 myths surrounding impact investing are.
1. Everyone agrees on what counts as an impact investment
Far from it: There is no consensus on what counts as an impact investment, largely because there is no single agreed-upon metric for impact. Some investors, for example, use IRIS, a tool that measures what an investment will do, how many people it will help, and by how much. Others, meanwhile, prefer to put an “economic value” on a human life (around $10 million for US citizens). But there's no answer that's right 100% of the time, which means every hedge fund is ultimately making things up as they go.
2. Impact investing and ESG investing are the same thing
In reality, their goal is to do very different things. Impact investing is about generating positive outcomes, while ESG is more about how companies behave: it takes into account the risks to the financial value of an investment from environmental, social and governance factors.
ESG vs impact investing. Source: Future in depth
3. Impact investing means backing companies labeled “impact friendly”️
Unfortunately not. Many companies and funds have been incorrectly labeled as impact friendly. Transparency problems are partly to blame, but so is the “green wash” – the practice of making investments green or impact-friendly to attract capital.
Representation of "greenwashing." Source: EU Green Deal News
4. Impact investing means avoiding companies that “do it wrong”
Some of the world's biggest investors like to use a "commitment" strategy. In other words, they don't necessarily sell out or avoid companies that are, for example, bad employers or big polluters. Instead, they take a large enough stake in those companies to have a seat at the table, so they can push them toward positive change.
5. Impact investing means settling for low returns略
The financial gains and positive impacts are actually better aligned than ever. Two-thirds of impact funds pursue competitive, above-market returns, and the others may have simply accepted below-market returns as a way to achieve their strategic objectives.
How to take advantage of this type of investments?❓
Many impact funds are listed on exchanges just like stocks, and they all have different investment criteria: we can find one that focuses on solar energy companies, for example, while another invests in recycling companies. A good place to start is impact fund summaries from The Big Exchange, where we can see the funds classified by impact or performance. Those ranked highest for their impact are the following:
Funds with the best profitability of the last 5 years. Source: The Big Exchange And although it is worth remembering that past results are not indicative of future returns, the following funds have been the ones that have achieved the best returns in the last five years.
Funds with the best profitability of the current year (2022). Source: The Big Exchange.
It is also up to each one of us to choose funds that invest in areas that interest us. On the one hand, we want to make sure we understand how exactly the fund defines impact investing, so we can decide if that aligns with our values. And on the other hand, it's worth periodically reviewing our impact investments to make sure they're still doing the good we want. As with all investments, an investment rating or view can change over time as companies change and funds are refocused.