An estimated 5 to 7 trillion US Dollars is needed to achieve the SDGs by the deadline of 2030. Estimates for investment needs in developing countries alone can range from 3.3 to 4.5 trillion USD per year. Current funding from both public and private sources results in an annual deficit for developing countries of 2 trillion USD. Even if every Western country increased their spending tenfold from now until 2030, we would still be 20 trillion USD short. In essence, without significant amounts of private capital flowing to developing countries, the SDGs will not be achieved.
The message, focus and vision of the Sustainable Development Goals is shared amongst the wider preferences of many Millennials. More and more Millennials are voicing a need for collective action and opportunities to make a difference on local, national and global levels. For some, this might be achieved through volunteering, policy advocacy, doing their bit to Reduce, Reuse and Recycle or simply entering into the discussion. Amongst these actions, a parallel shift has become apparent across the investment universe towards sustainable investing options, often grouped under the popular term ‘impact investing’. It seems that younger generations are starting to question not only the day to day actions they can take to make a difference, but also how they can create shared value through their savings and investment choices. The investment industry is continuing to respond to this demand. A quick Google search proffers an endless amount of articles, analysis and services around the sustainable investment world.
Impact investments are investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals.
The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education. In essence, the impact investment industry seeks to leverage investment opportunities to create shared value globally whilst addressing societal and environmental challenges- a seemingly perfect response to the aforementioned SDGs.
Impact investing is just one of many types of investment strategies which falls under the umbrella of ‘sustainable investing’. Other categories and nomenclatures include ESG (Environmental, Social and Governmental), ethical and SRI (Socially Responsible) investing. The GIIN (the Global Impact Investing Network) offers a wealth of resources and information on the sustainable investment world. It currently estimates that investors committed a total of 25.9 billion USD to impact assets in 2017.
Many portfolio managers used to believe – and some still do – that allocating funds towards more sustainable companies and investments would require sacrificing yield. But empirical evidence shows that, on average, this is not the case. In some instances, taking sustainability into account can actually enhance corporate financial performance, while investment funds oriented to sustainability are likely to perform as well or better than traditional funds (GIIN.org).
In light of the above, products and services around impact investing are on a firm path towards becoming mainstream as demand continues to grow, both in the U.K. as elsewhere. $30 trillion in assets is expected to be passed from the baby boomer generation to millennials in the coming years (Forbes.com). When savings and investment returns can be coupled with making an impact, a perfect match is made for an ever growing number of conscious consumers and investors.
Investment managers- both new and old- are tapping into this demand with dedication. Last year, Morningstar introduced the Sustainability Rating for funds, a tool that helps investors to assess funds underlying holdings on environmental, social and governance factors. JP Morgan, Goldman Sachs and Credit Suisse, amongst others, all offer variations of impact products. UBS raised $325 million for a Bono-backed impact investment fund in July 2017. Triodos - a Dutch bank which calls itself the “world’s most sustainable bank”- recently launched the UK’s first ‘impact’ crowdfunding platform, allowing individuals to invest directly in equity or bonds issued by organisations delivering positive social or environmental impacts.
All in all, it seems that societal calls for shared, positive value - driven largely by millennials- is leading to structural shifts in the investment universe. In a 2014 World Economic Forum study, 5,000 millennials surveyed in 18 different countries indicated that the overall top priority for any business should be “to improve society”. Questions remain as to how positive impact (whether societal or environmental) can be measured and monitored. Furthermore, as the track record of impact investments builds, we will be able to critically assess the value and returns these investments offer.
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