Challenges and opportunities
The challenges represented by the SDGs are huge, but so too are the associated opportunities, and the potential rewards.
A report by the Business & Sustainable Development Commission found that achieving the SDGs in just four economic areas could open 60 market ‘hot spots’ worth an estimated US$12 trillion by 2030 in business savings and revenue. The report highlighted that, for example, achieving the single goal of gender equality could contribute up to US$28 trillion to global GDP by 2025, according to one estimate by the McKinsey Global Institute. The overall prize, it said, was enormous, and impact investors are at the vanguard of capitalising on these opportunities.
Looking closer at impact
Historically, impact investing consisted primarily of private finance to fund specific, impactful projects. Because of this, it sat chiefly within the sphere of institutional or high net worth investors, with little access for the general public and more limited capital available. But that is not to say the demand isn’t there.
Impact investment has become one of the fastest-growing areas of responsible investment (albeit from a low base), attracting interest from a wider set of investors than seen previously. In 2018 the Global Impact Investing Network (GIIN) survey found respondents collectively managed over US$228 billion in impact investing assets – up from US$114 billion reported in the 2016 survey.
A portion of this growth is driven by the emergence of listed equity funds with impact remits. These can provide
liquid, open-ended investment vehicles, which allow for the ‘democratisation’ of impact, giving a stake in the game to ordinary people who want their investments to make a difference, or who realise the vast opportunities offered by investing for the good of society.
Different to ethical or ESG
Impact investing is fundamentally different from traditional ethical investing or environmental, social and governance (ESG) investing – even if the difference may seem subtle on the surface.
Ethical investing has been with us for decades, and some would say longer. It had its origins in the Quaker movement and was originally a matter of negative screening, put in place to match the values of individuals or the public institutions and foundations representing them. ESG investing takes a broader approach and incorporates environmental, social and governance considerations alongside – or within – financial analysis.
It looks to integrate issues such as shareholder rights, stakeholder considerations and reputational risk into the investment framework. Often, these strategies still have some basic exclusions, but the focus is on identifying the ‘extra-financial’ risks and opportunities a company is facing within the more traditional financial analysis.
Impact funds in the listed equities space, meanwhile, need to invest in companies that have the explicit intention of addressing a range of societal and environmental issues the world is facing, again, increasingly framed by the SDGs. Along those lines, there are several areas that impact investors have to consider, beyond the financial investment case for a business.
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