If there was a way wherein investors could use their hard-earned savings to reap returns at par with the market, while doing some good to the society, it’s an option worth your time (and money) right?
Impact investing is one such way that is quickly turning into an attractive investment option for those hoping to align their portfolios with their personal values. If you thought of it more as a fad, evidence suggests otherwise, as a growing number of individual and institutional investors are seeking such investing opportunities.
But what really is the hype all about?
‘Impact investing’, as the term suggests, are investments simply aimed at making meaningful impact towards society or environment even as you pocket the usual gains from your investments. What’s interesting is that these can be made in both emerging and developed markets, while targeting a range of returns from below market to market rate, but that depends on an investor’s goals.
The growing market for this type of investments uses the capital to address the world’s most pressing problems in sectors like sustainable agriculture, renewable energy, conservation, microfinance, while not omitting affordable and accessible basic services like housing, healthcare, and education.
A quick look back at when and how it came into being
Impact investing or in other words socially responsible investing (SRI) has its roots traced to the religious teachings of Judaism, Islam and Christianity. In the last century, the concept began to gain popularity in the US following the Vietnam war when protesters demanded that university endowment funds no longer invest in defence contractors. Gaining momentum in the 1970s, SRI’s long-standing principles progressed to represent a consistent investment philosophy allied with investors’ concerns. These ranged from avoiding the slave trade, war and apartheid and supporting fair trade, to issues more common today concerning the ethical impact of environment, social, and corporate governance (ESG).
Why opt for impact investments?
Let’s delve a bit deeper on why one should opt for this investment type and what makes it unique.
Impact investing challenges the long-held views that social and environmental issues should be addressed only by governmental agencies and philanthropic organisations, and that market investments should focus exclusively on achieving financial returns.
What the impact investing market offers are diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns.
Many types of investors are entering the growing impact investing market. Currently, banks, Islamic financial institutions, pension funds, financial advisors, and wealth managers are providing socially responsible investment to both individuals and institutions with an interest in general or specific social and/or environmental causes.
In this context, institutional and family foundations can utilise their financial resources to advance their core social and/or environmental goals, while maintaining or growing their overall endowment.
Government investors and development finance institutions can play key roles in identifying viable impact investments to investors who are committed to specific social and environmental goals.
Are impact investments worth it?
Impact investors have diverse financial return expectations. Some intentionally invest for below-market-rate returns, in line with their strategic objectives. Others pursue market-competitive and market-beating returns, sometimes required by fiduciary responsibility.
Most investors surveyed in the GIIN's [Global Impact Investment Network’s] 2019 Annual Impact Investor Survey pursue competitive, market-rate returns.
- 66 per cent at risk-adjusted market rate of returns
- 19 per cent below, but closer to market rate of returns
- 15 per cent below market rate of returns
Many impact investors choose to invest through funds whose social, environmental, and financial goals match their own. Managed by the GIIN, ImpactBase is the online global directory where investors go to find impact investment products.
How big is the impact investing market?
Impact investing is still relatively a new term, used to describe investments made across many asset classes, sectors, and regions.
The GIIN recently published Sizing the Impact Investing Market, the most rigorous analysis to date of the current size and composition of the impact investing market. The GIIN estimates the current size of the global impact investing market to be $502 (Dh1844) billion. Based on the collation of AUM data on more than 1,300 impact investors around the world, this research also underscores the diversity of the market, capturing data from many types of investors.
Current size of global impact investing market
What’s the current state of the market?
While some investors have been making impact investments for decades, recently there has emerged a new collaborative international effort to accelerate the development of a high-functioning market that supports impact investing.
While this market is still relatively new, investors are optimistic overall about its development and expect increased scale and efficiency in the future.
How big are impact investments in the UAE or the region?
Recent studies among UAE investors showed there is good share of high net worth investors who are keen on committing more resources to sustainable investments.
A recent study done by Investor Watch report by UBS Global Wealth Management conducted among more than 5,300 millionaires across 10 markets such as Brazil, China, Germany, Hong Kong, Italy, Singapore, Switzerland, UAE, United Kingdom and United States with at least $1 million in investable assets (excluding property), found that the highest rates of adoption in sustainable investing was found in the UAE.
From a sample size of 408 investors in the UAE, the study found a vast majority (93 per cent) of UAE investors believe they are not giving up investment performance by choosing a sustainable investment, in contrast to a global average of 82 per cent. Further, 66 per cent of UAE investors expect sustainable investments to outperform traditional investments, compared to 50 per cent of investors surveyed globally.
Of UAE investors expect sustainable investments to outperform traditional investments
The study showed that UAE investors expect sustainable investing to grow from 53 per cent of investors to 66 per cent over the next five years. Three quarters of investors (75 per cent) expect it to become the norm in a decade, well above the global average of 58 per cent.
Leading adopters of sustainable investing are UAE investors aged over 65, with 73 per cent of this age group expecting to hold sustainable investments by 2023, compared to 65 per cent of 18 to 34-year-olds.
The desire to make a positive impact is particularly strong among entrepreneurs, including entrepreneurs in the Middle East. According to the second Essence of Enterprise report conducted by HSBC Private Banking in 2017 showed, 29 per cent of Middle Eastern entrepreneurs in their 20s are motivated to set up their business in part by the desire to have a positive impact on their community, while, 33 per cent say they are also driven to have a positive economic impact — a greater proportion than their peers in every other region surveyed. By contrast, 20 per cent of all entrepreneurs globally are motivated by the need to have a positive impact on their community, while 25 per cent want to have a positive economic impact.
Who stands to benefit from impact investments?
Now let’s dive deeper into who really are making these investments and who stands to gain the most from them.
The fact is impact investments have attracted a wide variety of investors, both individual and institutional.
- Fund Managers
- Development finance institutions
- Diversified financial institutions/banks
- Private foundations
- Pension funds and insurance companies
- Family Offices
- Individual investors
- Non-governmental organisations
- Religious institutions
Options for individuals?
Impact investment opportunities for individuals are relatively small in our part of the world with the exception of a few sukuks and green bonds issued occasionally in the region (A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia, as per Investopedia.com).
However, globally there are a number of platforms, equities and debt funds that offer impact investment opportunities. Available retail options can be broadly categorised into robo-advisors, fixed income investments, exchange-traded funds (ETFs) and other offerings. Some of these offerings have their own platforms where you can invest directly, like CNote, whilst others are available through brokers, or via direct offerings like Calvert. Here are a few examples.
Category: Robo advisor
Aspiration offers a mix of banking and retirement services, links to charitable giving and investment products. Unlike other platforms, Aspiration allows customers to decide how much to pay towards their monthly fee, “what you think is fair – even if it is zero”. They also incorporate the Aspiration Impact Measurement (AIM) system into their banking which allows you to track your personal ‘People and Planet’ impact as you shop.
- Minimum: $0- 10
- Fee Types: “Pay What is Fair”
- Products: Banking Services, Retirement Services, Professionally Managed Funds
- Returns: Market
Betterment, an investment platform founded in 2008, has recently added elements of impact investing to their lineup of products. In 2017, they introduced their “Betterment SRI” (Socially Responsible Investing) portfolio strategy.
- Minimum: $0 for their Digital Plan; $100,000 for their Premium Plan
- Fee Types: 0.25 per cent for Digital; 0.4 per cent for Premium
- Products: US Large- Capitalisation Stock
- Returns: Market
Capital Impact Partners
Category: CDFI [Community Development Financial Institution]
Capital Impact Partners is a nonprofit CDFI that seeks to leverage its 30-plus year relationship with traditional financial institutions and other funding sources to support the equitable development of local communities. They achieve this by arranging loans tailored to the needs of their low and middle-income borrowers.
Capital Impact Partners is focused on services like; healthcare, education, affordable housing, and healthy foods for those in under-served communities.
- Minimum: $1000
- Fee Types: None
- Products: Fixed Income Notes
- Returns: Fixed Interest Rates according to 1 to 10-year terms
Category: Platform & CDFI
CNote is a first-of-its-kind financial platform that allows anyone to make money investing in causes and communities they care about. With the mission of closing the wealth gap, CNote directs every dollar invested toward funding female- and minority-led small businesses, affordable housing and economic development in financially underserved communities across America.
- Minimum: $1
- Fee Types: No fees
- Products: Fixed Income Investments
- Returns: 2.75 per cent product with quarterly liquidity
Category: Community Investment Note
Calvert was one of the first family foundations to trade mutual funds to avoid doing business during apartheid in South Africa. They officially launched their portfolio and Community Investment Note in 1995. In their own words, Calvert has made it their goal, “to serve sectors and regions that are often overlooked or underserved by the traditional capital markets”.
- Minimum: $20 for direct and Online Plan; $1000 for Brokerage Account
- Fee Types: Brokering fee for the Brokerage Account
- Products: Fixed Income Investments
- Returns: Market
Earthfolio does not only bear the distinction of being the first online investment service to focus primarily on sustainable investing, but in 2015 they also launched their app. Earthfolio screens its investments against 10 ESG criteria. These stated ESG criteria include: Environment, Animal Welfare, Equality and Diversity, Non-Violence, Healthy Living, Corporate Governance, and Community Development.
- Minimum investment : $25,000
- Fee Types: 0.5 per cent annual fee
- Product: ETFs, Stocks, Bonds, Mutual Funds
- Returns: Market
In addition to these examples, there are dozens of such impact investing funds and platforms available globally.
What are the key risks one should be aware of before investing?
Understanding risk and approaches to risk management are perhaps the central considerations for any investor. Here are some of the key risks you would be faced with.
- There is a possibility that what may first be viewed as a “good thing” may actually end up being “not so good”. For example, the controversy regarding palm oil harvesting for bio-fuels or job creation that acts to accelerate the movement of people out of rural areas and into already challenged urban centres.
- Due to various constraints in raising and investing capital (when the funds don’t attract as much capital), the fund manager may be forced to close a fund. So investors should be careful to not get caught in stalled funds or invest in funds that are unable or too slow in deploying the capital in suitable impact investments.
- Since many impact investment alternatives are less established, smaller and more “specialised” impact investment fund managers face greater challenges in realising investment returns in the future.
- Evaluating the organisations in which they're considering investing can sometimes be painstaking. There is also a degree of uncertainty when entering new markets, making it often perceived to be riskier propositions than most other forms of investment.
- Some funds may be way too reliant on grants or other subsidies such as investments from concessionary funders and whether that added complexity is likely to yield either better results, or perhaps fail to materialise at necessary levels, therefore impairing the outcomes of any given investment strategy. So ensure to check the history or background of the funds.
- It is generally accepted that impact investments require far longer timelines for returns than other types of investment. The rationale behind this is that impact-orientated businesses take a long time to become financially self-sustainable.
- Like in all other investment options, protecting one’s capital and earning decent returns is the objective of socially responsible investments too.
So, beware of online scams.
Checklist before stepping in
- Check the performance history
- Check if the funds, platforms, schemes are regulated by reputed regulators, like Securities and Exchanges Commission (SEC) in the US or Securities and Commodities Authority (SCA) in the UAE or any such competent regulatory body within a jurisdiction where the investment is made.
- Check the viability of underlying assets in the scheme