How to save the world and make money doing it - impact investing explained

You’re sitting down behind your laptop. You open your browser and start typing away.

As you’re going through the search results, you start to get slightly annoyed.

That thing you’re trying to find out doesn’t appear in the results. Only evidence to the contrary seems to come up…

Do you recognise that feeling?

ESG might not be so bad after all

This was how I felt last week when I was trying to find evidence that ESG investing is good for the world and your wallet.

As you have seen in the previous newsletter, the results weren’t stellar for ESG investing.

[don’t forget the check out the previous newsletter if you need a refresher on ESG]

So this week, I reached out to some investment professionals on LinkedIn.

One of them (thank you, Marc!) pointed me to this meta-study.

In it, the authors analysed over 2000 empirical and review studies on the relationship between ESG and performance (CFP).

Their findings?

Roughly 90% of studies find a non-negative ESG-CFP relation. But, more importantly, the large majority of studies report positive findings.

So ESG might not hurt (or even help) performance after all!

But is ESG sustainable enough?

While ESG is excellent and a good tool to get to a “cleaner” investment portfolio, it’s not everything.

Me selling all my shares in Shell will not suddenly make that company more sustainable.

So if we want to invest in actual green impact, what can we do?

This will help you make sense of the sustainable landscape

Let’s look at something called the Spectrum of Capital, first published by Bridges Fund Management (2015).

If we put traditional investing on the left and get more and more “green” as we move to the right, we get the following image:

We start with traditional investing, followed by responsible investments and its sub-group, impact investing.

The “greenest” here is, of course, philanthropy. Which is great on its own but doesn’t offer us any financial returns.

We can then further distinguish these groups by looking at what they primarily focus on:

Traditional investing just focuses on financial returns.

We then get greener as we apply negative screening (removing unwanted investments), positively selecting for ESG and impact-driven investing.

Within impact investing, we can distinguish between financial and impact first.

Whereas philanthropy is impact-only.

And here’s the complete picture. We can see the different financial goals. Impact first investing is okay with accepting a low(er) risk-adjusted return. That means they are fine with making less money for the risk they are taking. Because they get the impact as a reward.

Financial first impact investing wants impact but doesn’t want to sacrifice financial returns.

Philanthropy is okay with losing the money they donate (duh).

Hopefully, this helps you make sense of the sustainable investing landscape.

Tangible impact through impact investing

To me, impact investing is a nice mix of real impact whilst still making money.

But what is it exactly?

According to the GIIN(Global Impact Investing Network), it is:

“Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

Okay, so actually, measurably, making a social and/or environmental impact with your investments.

Where ESG investing looks to integrate environmental, social and governance factors, impact investing goes a step further.

Often, but certainly not always, the UN’s 17 Sustainable Development Goals (and their 169 sub-goals) are being looked at to judge the impact.

How to avoid greenwashing?

The above sounds great, of course.

You might wonder what stops firms from labelling everything they do as “impact investing” to attract more investors?

The GIIN offers four “core characteristics” that investments need to have before they are considered actual impact investments.

1. Intentionality

- There should be an intentional desire to contribute to measurable social or environmental benefits. Meaning there should be an aim to solve problems and address opportunities. This mainly makes it different from other investment approaches that see impact considerations as “a side thing”, an added accidental benefit.

2. Use evidence and impact data in investment design

- The investments can’t be designed on hunches. Meaning, evidence and data need to be used so that the investments can be “designed” to contribute to social and environmental benefits.

3. Manage impact performance

- Investments need to be managed towards the intention that comes with impact investing. Feedback loops and communication should be in place to increase the impact.

4. Contribute to the Growth of the Industry

- The GIIN aims to let all investment professionals speak the same language regarding impact investing and share their learnings. So that the overall impact investing industry might grow further and faster.

Examples of different types of impact investing

You might think that’s nice and all, but what kind of investments are actually considered impact investments?

Well, this section is for you, my friend!

I’ve grouped some by different topics. This list serves as inspiration, is far from exhaustive and is not a recommendation to buy 😉

Public equity funds

The funds invest in companies that help the world do better. Think about topics like Circular Economy, Energy Transition, Water, Health and Wellbeing, Education, Financial Inclusion, Future Mobility, Food Security, etc.

You can search for “impact” through your broker, and you’ll find many of these.

• Triodos Sustainable Equity Fund

• Hermes Impact Opportunities Fund

• Wellington Global Impact Fund

• NNIP Global Equity Impact Opportunities

• ABN AMRO Impact Equity Fund

Microfinance

These funds provide micro-financing for entrepreneurs in emerging countries, helping them provide a living for themselves and their families.

• ACTIAM Institutional Microfinance Fund

• ASN Novib Microkrediet Fonds

You can also get directly involved with micro-financing through platforms such as Lendahand.

With MoneyMinds, I’ve committed to investing 10% of all profits through Lendahand. You can read more about that in this blog post.

I need help selecting investments

The best resource I’ve found so far is the website Impactyield.com. You can find funds by filtering on geography, SDGs, impact themes, asset class and more.

ImpactYield only lists impact funds with an intentional impact strategy. So no “impact washing”.

​Check them out if you want to know more!

You made it!

That’s it; we’re done!

This one was a bit longer because we had a lot of ground to cover.

Congrats on making it all the way down here! You’re basically an impact investing expert now 😉

Disclaimer

As always, the information I provide is sourced from both reputable sources and my own experiences. I intend to inform you about the financial world and help you make better decisions, but none of the information in this email should be taken as financial advice or advice to purchase certain financial products. Investing involves risk of loss. See our full disclaimer here.