Discover the world of Impact Investing and why it’s taking over

5 minutes
October 4, 2022

It's now globally expected that companies consider the environmental aspects of their decisions and act responsibly towards their local communities. At the same time, investors are becoming more aware of environmental, social, and governance (ESG) factors when making investment decisions.

Why now? As global challenges like climate change and social inequality continue to increase, more people are becoming aware of the need for responsible investment. Through Impact Investing, investors play a key role in helping to achieve Sustainable Development Goals (SDGs). This is part of a larger movement where individuals use their money to create positive change in the world.

What is Impact Investing and what are Its key principles?

Impact Investing is a way for investors to put their money into something that will have a positive impact on society like creating more affordable housing, job growth, or more local foods being grown. By aligning their values with their investment portfolios, they can create real change in the world.

In order to achieve this, Impact Investors often adopt one or more of the following key principles:

  • Invest in companies, entrepreneurs, and funds that have a clear mission to generate social or environmental impact.
  • Consider ESG factors alongside financial returns when making investment decisions.
  • Actively seek out opportunities to invest in undervalued communities and sectors.
  • Use an evidence-based approach to measure and manage the impact. 

How has Impact Investing grown in popularity in recent years?

A few key global trends in the past two decades have set the stage for Impact Investing, and now there are some powerful social movements driving it even further. One big factor is that an unprecedented amount of money will change hands from older generations to millennials in the coming years. That's significant because millennials are much more interested than previous generations in sustainability and making a positive difference.

Another macro trend is the growing number of female investors. Women participating in the financial industry, handling money, or making investment decisions was previously uncommon compared to males until a few decades ago. Female investors are typically more concerned with sustainability than their male counterparts, and there is also evidence abound that companies with significant female leadership perform better overall. 

And finally, the most notable macro trend would be the fact that financial sector investors have recognised significant investment prospects in sustainability. Whether it's investing in alternative energy, microfinance, or other areas, there's a lot of potential for both development and impact. Social changes such as these have sped up the growth of social impact investing, and it’s no longer a trade-off or a choice between one or the other.

The challenges that still face the Impact Investing industry

Although Impact Investing has expanded rapidly in recent years, it continues to face some significant obstacles. Because there is no standard way to measure impact, investors have a difficult time comparing different opportunities and making decisions about where to invest. Even the current push towards a defined ESG rating to compare funds on a like-for-like basis is far from clear to most investors and fund managers, with the topic being more of a buzzword than a metric.

Furthermore, many financially effective companies or funds are situated in countries that are still growing economically, where investment costs tend to be higher. Moreover, due to the type of work they do, these companies often have higher risks that can further increase investment costs. However, as the industry develops, it's likely that these challenges will be addressed and solved.

Positive trends for the future of Impact Investing

There are four large social trends that are strongly influencing the direction of the Impact Investing sector and are proving positive growth momentum:

  1. Consumers (Millennials) are willing to pay more for products and services that they believe to be sustainable or impactful
  2. Employees are willing to work for less if their employer is socially responsible
  3. Trust is eroding, with more investors realising that their government is not the answer to societal problems and so must take matters into their own hands
  4. Social Impact is mainstream and here to stay. This demands that larger institutions take a more active role in sustainability and social factors.

Final thoughts

Impact investing is a rapidly growing industry that has the potential to make a huge impact in the world. It's driven by social movements, supported by financial institutions, and influenced by powerful global trends. Although there are some challenges that still need to be addressed, the future looks bright for Impact Investing. 

ScalingFunds has believed in the power of these investments from day one, which is why we continue to offer fund managers an ever-improving experience so that they can raise money for their funds in the shortest possible time and with the least amount of effort and frustration. 

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