Impact investing means providing capital to companies that generate measurable social or environmental impact while providing financial returns. Through impact investing, investors can generate market-rate returns while backing several sustainable development goals such as poverty, hunger, equality, climate change and others. Impact investments are agnostic to markets, geographies and industries. This gives investors the flexibility to choose social or environmental causes they feel strongly about.
While impact investing has grown steadily in the past few years, lack of knowledge and abundance of misconceptions may discourage investors from making such investments. Here, we debunk five popular misunderstandings about impact investing.
Impact investing is ESG investing
A common misconception is that impact investing is the same thing as Environmental, Social, and Governance (ESG) investing. ESG refers to the environmental, social and governance practices of a company that may have a material impact on the performance of an investment. Today, public market strategies commonly use ESG to screen out investments that do not meet certain criteria. A growing pool of investors looking to feel better about their investments are forcing more public companies to track and report how they are doing with regards to these ESG topics. This is allowing more investors to consider ESG factors that are material to performance, alongside more traditional financial measures.
On the other hand, impact investing is more focused on the positive outcome of an investment. The goal of impact investing is to help companies realize specific objectives that are beneficial to society and the environment. Impact investing is all about the active and intentional deployment of capital to generate positive outcomes. It does not just avoid harmful activities but focuses on proactively supporting positive activities. Investors use impact investments in private markets to overcome global challenges such as those found in the United Nations Sustainable Development Goals (SDGs).
Impact investing is limited to combating climate change
Combating climate change is one of the 17 goals mapped out in the United Nations Sustainability Development Goals (SDG’s). Many impact investments help support projects that reduce global warming, but it is not limited to them. Impact investments provide capital to various projects that promote a variety of the UN’s sustainable development goals. While protecting the environment remains a key goal, the idea is to encourage society’s overall development and not stay limited to climate change.
Impact investing is only in private markets
Today, private markets play a critical role in supporting impactful businesses across many geographies and industries. It is a widespread belief that impact investments will stay in private markets, but we see public equity markets playing an important role in the growing impact ecosystem. Public markets can offer solutions that private markets cannot by allowing more market participants in a space long available only to high-net-worth and institutional investors. This transition will be critical to meeting the global need for impact capital.
Impact investing provides fewer returns
A survey by GIIN and JP Morgan claims that 55% of impact investment opportunities deliver competitive market-rate returns. Another study has found that 90% of impact investments show a positive or neutral impact on financial returns. Therefore, the belief that impact investments provide fewer returns than standard investments is unsubstantiated.
Impact investing is just a fad
Another popular opinion about impact investments is that it’s just a fad that will soon die out. Interestingly, financial institutions have claimed that the impact investment market will grow by $1 trillion in the next three years. Impact investments are here to stay, and there is a growing need for capital in the space. There is an estimated annual shortfall of approximately US$2.5 trillion in developing markets. More capital is needed to meet the sustainability development goals by 2030.
About Impact Capital Partners
Are you an institutional investor looking for impact investments? If yes, then Impact Capital Partners can help you connect with impact investments. We will help you find top impact investments that generate returns while promoting the causes you believe in. If you have any queries about impact investing in the USA, you can fill our online contact form, and we will get in touch.