Sustainable investing: Impact investing – This is what impact investing is all about
Sustainability is a topic that is occupying more and more people and is therefore becoming increasingly important for investors. So it is that sustainable investments are also currently very popular. One form of this is impact investing.
• Demand for sustainable investments is increasing
• ESG criteria play a role in impact investing
• Impact investing in Germany today is a billion-dollar market with growth potential
Nowadays anyone involved in investing has probably heard of ESG investing or the ESG approach. The three ESG factors can be derived from the acronym: E for Environment, S for Social and G for Governance – in English, environment, social and leadership. With such systems it is not only about the return, but also about social and ecological aspects and the control processes of companies. Impact investing goes beyond that, however.
Definition Impact Investing
Impact investing is also a type of sustainable investment. As the term “impact” suggests, impact investing is about the impact of an investment. In this type of investing, not only should the social and ecological aspects be compatible with the investor’s awareness – investors should see in concrete terms what effect their own investment has on certain areas. The Federal Impact Investing Initiative (Biii) describes impact investing as “an investment approach that goes beyond a pure focus on return and risk. Positive social and / or ecological effects should be as direct, intended and verifiable as possible. We are concerned with measurable positive effects social and / or ecological impact. ” According to this definition, impact investing also goes beyond the previous ESG or SRI approaches. Nevertheless, in the best case scenario, the investments should of course also generate returns.
In a study on the impact investing market 2020 in Germany by the federal Impact Investing initiative, carried out by the Center for Social Investment and Innovations at Heidelberg University and funded by the BMW Foundation Herbert Quandt, the Bertelsmann Foundation and the Federal Association of German Foundations, the Biii borders Impact investing in the narrow understanding of impact investing in the broad understanding. In impact investing, for example, there is a narrow understanding of the Impact-First strategy, which focuses “primarily on social or ecological returns and only secondly on financial returns,” and the Finance-First strategy, which focuses on “financial returns, but strategically is expressly combined with social or ecological yield expectations “, aims. When it comes to impact investing in the broader sense, there are socially responsible investments that aim for financial returns but generate “positive social or ecological externalities” and ESG investing, which generates financial returns, “but with social, ecological or governance risks or corresponding ones negative externalities “avoids.
Goals of impact investing
In 2015, all member states of the United Nations adopted the 2030 Agenda for Sustainable Development. According to the UN, it should offer “a common concept for peace and prosperity for people and the planet, now and in the future”. At the center of this agenda are the 17 Sustainable Development Goals (SDGs), which call on industrialized and developing countries to act. These goals include, for example, topics such as combating poverty and hunger in the world, health for all, combating climate change, decent work and economic growth, affordable and clean energy, education for all, responsible consumption and production, and sustainable cities Municipalities.
These Sustainable Development Goals are used as templates for many impact investing strategies – individually or as a combination of several different goals. According to the market study by the Federal Impact Investing Initiative, they are playing an increasingly important role as a global reference framework for impact investors and they cover the entire spectrum. The top three Sustainable Development Goals alone – health for all, affordable and clean energy and sustainable cities and communities – account for an investment volume of almost one billion euros, according to the Biii study.
Investors can invest their money here
According to Commerzbank, the offer for impact investment is often tailored to large investors and does not take place on the regulated market. As the Federal Impact Investing Initiative found in its study on the German impact investing market, foundations and family offices account for more than half of the total investment volume of all four investment strategies of 6.5 billion euros (broad understanding of impact investing). According to the narrow definition of impact investing (2.9 billion euros), foundations and family offices account for more than a quarter of the total volume. “These sums are invested at the same time by a small group of a few (15 organizations) financially strong players,” said the Biii. However, banks and asset managers have caught up with impact investing and now also hold large shares.
Due to the increasing demand from private investors, however, publishers are also working on bringing financial products for smaller investment amounts and with a transparent risk onto the market. As Commerzbank writes on its website on the subject of impact investing, this gives investors the opportunity to invest their money in funds with an impact-oriented approach, microfinance funds, social impact funds, green bonds or a company participation.
While corporate investments, funds with an impact-oriented approach or funds based on ESG criteria and green bonds are likely to be familiar to everyone these days, social impact funds and microfinance funds may be less well known. Commerzbank describes Social Impact Funds as intermediaries between startups and investors, where six-digit deposit sums are the rule. Microfinance funds, on the other hand, give their capital to so-called microfinance institutions in emerging or developing countries, which in turn give the money in the form of loans to the self-employed or small and medium-sized enterprises. According to Commerzbank, however, the social impact is partly controversial, “because such microcredits are often provided with interest in the double-digit range in order to secure a return for investors” and the risk for investors is hardly manageable.
The impact investing market is growing rapidly
As the Federal Impact Investing Initiative writes on its website, the German impact investing market is still in the pioneering phase. Although there are already some specialized investment funds, consultants, intermediaries and networks, the topic has not yet reached the masses. Interest in impact investing on the part of investors, the social economy and science has been increasing significantly in Germany for years. According to Biii, the impact investing area has great potential. The topic must therefore be brought even more into focus in Germany.
The market study of the Federal Impact Investing initiative from last year showed “that impact investing in Germany today is a differentiated billion-dollar market with great growth potential and high dynamics.” For the study, data were used that were collected through an online survey as well as “in the context of stakeholder dialogues with investors, intermediaries and investors”, explains the Biii. In addition, findings from a comparative research of existing analyzes, also from other European countries, were included. Since parts of the market study were already drawn up under the impression of the COVID-19 crisis, the study reflects the status of the impact investing market before the COVID-19 crisis, but allows a first outlook on its effects on the impact investing market , according to the federal initiative Impact Investing.
The impact investing market has grown rapidly over the past five years. According to the market study by Biii, the 2016 market report by the Bertelsmann Stiftung identified a market volume of 69 million euros for impact investing in Germany at the end of 2015, while in 2020 impact investing in a broad sense a market volume of around 6.5 billion euros and in a narrow sense a market volume of around 2.9 billion euros had been reached.
Advantages and disadvantages for investors
Impact investing therefore offers investors an opportunity to invest their money and thus maintain its value or, better still, of course, to achieve a return, while at the same time achieving a social and ecological impact. Investors can do something for social justice and the environment, for example by investing their money in a company or a fund that pursues the same goals as them.
However, there are currently a number of challenges for the impact investing market. The federal initiative Impact Investing calls it: “Too few suitable investment products in different asset and risk classes, insufficient support from politics, for example through the adjustment of legal framework conditions, as well as a lack of incentive mechanisms for more impact-oriented company start-ups and financing, which on a larger scale the potential of Could demonstrate impact investing. ” In addition, there is still room for improvement, especially in the areas of impact measurement, market transparency and the knowledge and expertise of market participants.