Back 30.07.2019

The times they are a-changing: what kind of future are you investing in?

Our future, and the future of the next generations, is determined by what we do with our money today. Not only on how we consume it, but how we save and invest it.

“What we invest in today will determine the world we live in tomorrow,” says a quote on the website of the Global Impact Investing Network, GIIN. According to GIIN, the size of the global impact investing market is app. EUR 450 billion. This is the sum of invested assets with the intention to generate measurable positive social and environmental impact alongside financial return.

To understand the scale and power of this market, one could make a comparison to foreign aid, the traditional way of doing good and building a better world, financed from government budgets. In 2018, global foreign aid flows totaled approximately EUR 135 billion. It is less than a third of the size of the global impact investing market.

Impact investing and foreign aid share some of the same objectives although they are totally different creatures. Often, both aim to promote sustainable development, for example in the form of supporting the UN Sustainable Development Goals. One of the key differences, though, is that impact investing mobilizes private capital whereas foreign aid only covers official governmental flows. Also, whereas foreign aid always targets developing countries, as defined by the OECD, impact investors could target developed economies as well. Importantly, impact investing seeks capital return, which foreign aid typically does not.

The ultimate goal of impact investing and ways to get there

Impact investing should be separated from responsible investing, an investment approach that aims to incorporate environmental, social and governance factors into investment decisions, to improve risk management and generate sustainable long-term returns.

Impact investing targets positive societal impacts, responsible investing integrates ESG factors in the decision-making. The first starts with impact, the second establishes organization-wide rules and principles for considering environmental, social and governance factors in investment operations. Depending on the rules and policies, it may or may not have impact on investment strategy and capital allocations.

Responsible investing does not necessarily aim to create positive impact, but it should try and minimize negative impacts – or at least be aware if there are any. On the other hand, it should not be taken as given that all impact investments integrate the responsible investing approach. According to newly established operating principles for impact investing, developed by the International Finance Corporation (IFC) they should, though.

Impact investing is not charity. By definition, impact investing seeks positive impacts alongside financial returns. Depending on the type of investor, however, an impact-hungry investor could be satisfied with a lower-than-market return on capital. Some philanthropists are eager impact investors. A survey conducted by GIIN in 2018, reveals that nearly two-thirds of respondents target risk-adjusted, market-rate returns (64%). The remainder seek below-market-rate returns that are either closer to market-rate returns (20%) or closer to capital preservation (16%).

We cannot afford to waste this investment opportunity

Impact investing is still a rather new industry, and thus, prone to misinterpretations, misuse and outright “impact washing”. Every investment has several impacts.

One investment could finance several activities and lead to a myriad of immediate outputs, intermediate outcomes and ultimate impacts. Impacts could be negative or positive. If it sounds complicated, that is because it is. Hydropower, for example, could provide access to clean and affordable energy, but same time, it could jeopardize the livelihoods of local communities or entail risks for biodiversity. No wonder impact-driven investors could feel they are lost in translation. There is an increasing demand for transparency, measurement and reporting on the results and trade-offs.

So how should one know if they can trust a source claiming to invest for impact? One could start with the signatories of the IFC impact investing principles. One could then check whether the signatory organization has public disclosure on its operating principles on the four levels of impact management the IFC refers to; strategy, deal origination and structuring, portfolio management and exit. An independent verification on alignment would be a further proof.

The Finnish impact investing market is gaining momentum

In Finland, the market for impact investing is quickly evolving, responding to a demand from investors who are ever more interested in shaping the future. Finnfund, the government-owned development finance institution and the first Finnish organization to sign the IFC impact investing principles, and OP, the largest financial services group in Finland, have recently established a joint fund that aims at positive measurable impact on the UN sustainable development goals while providing an attractive return to institutional investors.

In 2018, one of the largest NGOs in Finland, Finn Church Aid, established its own impact investment fund with seed capital from the government’s budget. FCA Investments (FCAI) does not provide investment opportunities to external investors, at least not yet, but it is an important pioneer in the industry of NGO-led investment initiatives.

For private people in Finland, at the moment, the easiest way to invest for impact is via crowdfunding platforms where, with a rather small sum of money, any of us could e.g. contribute to climate change mitigation or the creation of sustainable jobs or support female entrepreneurs.

The selection of instruments available for individuals, who would like to put their savings into work for a better future, is still modest. However, it should not take too long for that market to develop as well now that the momentum is there.