Many investors want to know what is social impact investing and why is it a megatrend? And even more importantly, how can you profit from it in the years ahead?
The impact investing definition revolves around investors looking to invest in businesses that not just make money, but companies that have a lasting, positive impact on the planet and the people in the communities served.
Impact investing is sometimes referred to as ESG (environmental, social and governance), social impact investing, or positive impact investing. But regardless of the exact name of the investing strategy, all these names follow a similar idea that a responsible investment is one of investing in businesses that are profitable AND doing good things
Impact investing really started to ramp up in the 1960s, when protestors of the Vietnam war tried to pressure various university endowments not to invest in defense contractors who were profiting from the war and doing little to make the world a better place.
Over time this type of investing gained momentum to the point where some analysts now put assets under management related to impact investing at more than $700 billion via private equity and impact investing funds. This includes the Vanguard FTSE Social Index Fund that alone has more than $5 billion in assets and a five-star rating from Morningstar (out of five stars possible).
And the idea makes sense. If impact investors can make a social investment in a business with an environmental impact alongside a financial performance that is strong, why would you only invest in a business that is only making money.
There is no doubt that impact investors are here to stay. There is no going back. The investing theme around investing in businesses with positive measurable social and environmental impact makes too much sense.
But how will this investing theme evolve?
1. First, there will more pressure on public companies for transparency around of an accounting of the impact of the business on people and the planet. Right now, all reporting around impact investing is voluntary and the format that any business submits its data is unique.
Look for more uniformity around impact reporting as one or several generally agreed upon formats are centered around with the business and investing community.
Right now, the Securities and Exchange Commission of the federal government tells businesses how to present its financial information on a quarterly basis. Look for a similar type of standardization of impact investing information to come from a governmental body, or a well-respected nonprofit organization.
2. Look for impact investing assets under management to double rather quickly. At $700 billion in assets under management now for impact investing, this investing strategy has certainly reached a large size due to investor demand.
One thing you can always say about Wall Street brokerage firms is that they will continue to give investors what they want for as long as they want it.
We would not be surprised to see impact investing assets under management grow 20%+ a year, which would mean that we would increase assets under management to $1.4 trillion by the 2023 to 2024 range.
3. There needs to be better tools for investors to research how good or bad a public company is with its impact on people and the planet. Right now, each investor is on their own when it comes to evaluating a business for people and planet impact.
For some businesses it is obvious, but for many it is not. For instance, you do not need to look too hard at a fossil fuel or tobacco company to realize they do not fit the investing theme of impact investing. This is because these businesses have very little positive impact on people and planet because of either how the products are made, or how they are consumed.
But for other industries, it is not that easy to determine the impact on people and the planet.
Despite the relatively large size of assets under management, there are still not enough investing tools to help the public develop an impact investing criterion, and then evaluate individual businesses against that criterion.
4. Look for impact investors to delve more into controversial issues like racial prejudice along with economic and gender disparity.
These issues are somewhat on the radar right now, but impact investors seem to be more focused on environmental issues, that can be more easily quantified. For instance, it is easier to calculate if a business has become carbon neutral then it is to determine if a business is dealing with racial prejudice in an effective manner.
But these issues or racial prejudice, economic disparity and gender disparity are equally important causes for many impact investors. Look for them to get a brighter light shone on them in the years ahead.
Yogi Berra has a great quote …… “it’s tough to make predictions, especially about the future”.
And those words are as funny as they are true. In this article, we have tried to lay out what we see as the most likely trends in impact investing over the next five to ten years. Only time will tell how right we are.
One way to spot trends with impact investing is to follow what some of the more highly respected companies are doing when it comes to their impact on people and the planet.
In other articles at Wealthplicity we have written about some of the good things that companies like Salesforce, Microsoft, NextEra Energy, Nvidia and others are doing to help people and the planet while continuing to make large profits for their shareholders. Stay in touch with these companies to spot the up-and-coming trends in this exciting investing strategy area.
Summary
Impact investing is a megatrend that is here to stay.
However, like any trend it will evolve as it matures.
Use the predictions from this article to help you consider how impact investing will change in the years ahead. And then consider how you can profit from those changes.
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