We’ve asked the impact investing team at M&G Investments to give us an overview of the key issues involved with this crucial sector as we begin a new mini-series to focus on impact investing.
The world is facing a rising tide of societal challenges, from the potential chaos associated with the breakdown of our climate, to ludicrous levels of waste and pollution, to vast and growing social inequality. Governments around the world lack the resources needed to deal with these challenges on their own, and hence responsibility is increasingly falling to the private sector, and investors, to help do something about them. Impact investing, specifically, is starting to drive the flow of much needed capital towards solutions to the critical social and environmental challenges we are facing, but there is much more to be done.
Impact in brief
Impact means investing in companies that aim to deliver meaningful societal outcomes by addressing the world’s major social and environmental challenges, while at the same time producing a financial return. These investments can be made in both emerging and developed markets and target a wide range of impact areas, which can include climate solutions, accessible healthcare, the circular economy and quality education, among others. These impact investment areas are increasingly being mapped to the United Nations Sustainable Development Goals (SDGs), which provide a framework against which impact can be assessed and measured.
Why is impact necessary?
Recent campaigns, including the activities of Extinction Rebellion and the school strikes initiated by Greta Thunberg, have helped to highlight some of the real and present challenges the world is facing. With 20 of the past 22 years having been the hottest since records began, the world’s leading climate scientists warned last October that we only had a dozen years left to keep global warming to a maximum of 1.5°. The report, from the UN Intergovernmental Panel on Climate Change, said that beyond this, even half a degree would significantly worsen the risks of drought, floods, extreme heat and poverty for hundreds of millions of people
It is not only the challenges associated with climate change we are facing though. The world generates two billion tonnes of waste annually, and by 2050 it is estimated that if we carry on as we are, there will be more plastic in the oceans than fish (by weight).
Social factors, including education, employment status, income level, gender and ethnicity, have a marked influence on how healthy a person is, with health inequities having a significant financial cost to societies, according to the World Health Organisation (WHO). As an example, the European Parliament estimates that losses linked to health inequities cost around 1.4% of gross domestic product (GDP) within the European Union — a figure almost as high as the EU’s defence spending (1.6% of GDP). Meanwhile, last year the World Bank said that more than 260 million children worldwide were out of school, while more than half of those actually in education were not learning. The list goes on.
It was to tackle these kinds of societal challenges that the aforementioned SDGs were introduced in 2015. These represent a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity – with a time frame that runs to 2030. The 17 Goals (with 169 key performance indicators, or sub goals) build on the Millennium Development Goals, while including new areas such as climate change, economic inequality, innovation and sustainable consumption among other priorities. The SDGs also provide a framework for delivering sustainable outcomes, and are increasingly being adopted by both investors and companies as a means of framing their sustainable, or impact, activities.
It is also possible to create specific impact targets focused on key investible impact areas, which can also be mapped against the SDGs. This provides a robust investment and measurement framework, and helps impact investors to stay focused on the most pressing issues facing society and the planet we live on.
To meet these goals, it has been estimated that some US$6 trillion a year will need to be spent, but government alone cannot foot this bill – in fact, we are looking at a funding gap assessed to be in the region of some US$2.5 trillion. This is why investment capital is vital, and part of the reason why so much focus is being put on impact investment.
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