Around the world, social impact investing is gaining traction. ESG investing has grown by 60%; social impact bonds now exist around the world; and impact investing fund managers are investing in more deals, with more success.
The demand for impact investing comes primarily from millennials, who are looking to do more with their cash – they are more aware of social, economic and environmental challenges, and engaged with finding solutions and investment appetites are changing to match their activism.
Banks Are Waking Up to the Demand for Social Investments
Banks, HNWI, individual investors and everyone in between are getting involved in social investing, launching new products, and taking risks on social entrepreneurs.
As we've mentioned previously on this blog, alongside impact focused institutions like Triodos Bank, mainstream banks are realizing there is client demand for investments with both a financial and social return.
Credit Suisse launched an impact investing division in 2017, with a focus on financial inclusion, with clients investing primarily in microfinance projects. UBS also launched an impact fund at the end of 2017, with an ambitious target of having $5 billion of client assets invested in impact investments by 2021. Julius Baer, Deutsche Bank, and DBS also have impact investment offerings for their clients.
Barclays Bank was the first major bank in the UK to launch an impact fund, when they opened their Multi- Impact Growth Fund in 2017 and NatWest now offers loans to social enterprises in the UK, helping grow the companies that impact investors are looking to finance.
Individuals Can Now Make Impact Investments Alone
As well as banks making impact investments available to current customers, there are multiple impact investing platforms making socially responsible investing available to a much wider audience. Impact investing is now becoming available for everyone, even if you’ve never made an investment of any kind.
There are automated investment portfolios with a focus on impact investments, such as Swell, allowing you to invest in a group of companies around a certain theme, such as Renewable Energy.
Microfinance can be thought of as the start or the precursor to impact investing, and there are now lots of organization helping you invest in entrepreneurs abroad. Websites like KIVA make it easy to lend to individual entrepreneurs around the world, providing working capital for them to get their business launched. However, the limitation of a platform like Kiva is they don't give you a financial return on your contributions. Only a social one.
A Step Further: Financial And Social Impact
Taking it a step further, platforms with a financial and social impact focus, such as Lendahand, are increasingly popular, easy to use, and don’t require much previous knowledge or a large investment amount. You can usually start investing from about € $25 and get returns based on how risky the businesses you invest in are – most often you can expect returns around 6%
You can see how your money is having an impact; its inspiring to know you have helped provide electricity, or water to remote parts of the world, and will still be making a bigger return than if you had left your money in the bank!
About The Risks
Impact investing allows individuals and fund managers alike to achieve a return on their investment, while still having a positive impact on society. Beyond that, it can diversify your portfolio – why wouldn’t you get involved?
Well, like all investments, there are some risks. For starters, there isn’t as long of a track record in impact investing like there is in traditional investing. Therefore, you can’t compare as many metrics between investments. Further, some investments are inherently riskier due to the political landscape of their location, the size of the business, or the margins on the service they are providing; and due diligence is expensive and time-consuming, especially when compared to the amount you are investing.
Impact Investing Is Set to Continue to Grow
Not everyone is investing in socially responsible investments, yet, and the reasons for that are complicated. For many seasoned investors, their advisors may have never heard of impact investing, so they won’t recommend the opportunities in that space. For many, the idea that you are creating impact with your investment means that you won’t get any return – they just don’t trust it. While impact investments generally return less than a riskier VC or equity investment (broadly around 6 -12% for an impact investment), you can have an impact while still making a profit.
As impact investment opportunities grow to meet the demand by millennials, there will be more evidence that impact investing provides sustainable returns, and more projects demonstrating the impact alternative investment had on their growth. Similarly, as impact investment becomes more mainstream, more people will know about it and therefore be advised on impact investment as an investment strategy. The potential is exponential, and as demand for alternative investment products grows, companies are finding more and more ways to help customers have an impact while also making a return.