Despite the many societal challenges associated with the internet, viral news and social media, these digital forces have produced at least one great benefit for humanity: they’ve helped to put a human face on capitalism.
When a factory collapses on innocent workers overseas, when a wildfire wreaks havoc on communities during a drought, or when a whale washes ashore with a belly full of plastic, we see these disturbing images in real-time. The visual nature of news in the digital age has made us more aware and more concerned about social and environmental challenges.
Growing Concerns About Societal Challenges
A recent World Economic Forum survey of 24,766 young professionals between the ages of 18 and 35 found that this demographic believes environmental and social issues account for five out of 10 of the “most serious issues affecting the world today.” And the World Economic Forum’s 2019 Global Risks Report found that environmental risks account for six of the top 10 business risks in terms of likelihood.
But it’s not just the millennials and the Davos crowd who are sounding the alarm. Even the “mainstream” corporate C-Suite are beginning to recognize the strategic importance of societal issues. For example, a 2018 KPMG survey of 1,300 CEOs found that corporate executives place climate change and other environmental risks among the top five threats to growth.
And, as reported in the 2018 RIA Investor Opinion Survey, 81% of Canadian retail investors are concerned about climate change and the environment, and two-thirds would like a portion of their portfolio to be invested in companies providing solutions to climate change and environmental challenges.
Impact investing: a solutions-driven approach
This growing awareness of social and environmental problems has laid the foundation for impact investing. According to the Global Impact Investing Network, impact investing refers to “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.”
You may be wondering: What’s the difference between responsible investing (RI) and impact investing? Responsible investing refers to a wide range of investments that consider environmental, social and governance (ESG) issues. There are several strategies for incorporating ESG factors into investment decisions, notably:
> negative or exclusionary screening;
> positive screening or best in class;
> integration of ESG factors into traditional financial analysis;
> shareholder engagement;
> thematic ESG investing;
> norms-based screening;
> and impact investing.
So, you can think of RI as an umbrella term that encompasses numerous strategies or approaches, along a spectrum. Impact investing would be a pole on this spectrum, representing companies whose core business model is solving social or environmental problems.
Impact on the rise
As shown in the latest Canadian Impact Investment Trends Report, impact investing is growing at a staggering pace in Canada. Impact assets under management (AUM) in Canada now total $14.75 billion, up from $8.15 billion reported two years prior. This represents 81% growth over two years, which is nearly double the growth rate of all RI AUM over the same period.
Historically, impact investing was the domain of private markets, which are largely inaccessible to retail investors. But the latest data show that impact investing has assertively planted its flag in public markets. At the end of 2013, only 3% of Canada’s impact AUM were in public equities. Two years later, that figure rose to 20% and the latest data show that 41% of impact AUM are in public equities. That’s a thirteen-fold increase in four years.
A growing product landscape
The rise of impact in public markets is partially attributable to the growth of impact-focused products in recent years. For example, 2016 was a big year for retail impact products. NEI Investments kicked off that year by launching its Environmental Leaders Fund, with a focus on water infrastructure, energy efficiency, waste recovery and sustainable food. Later that year, Desjardins launched its SocieTerra Environmental Bond Fund — a portfolio of “green” bonds — and its SocieTerra Cleantech Fund, which invests in environmental technologies and solutions. Prior to 2016, AGF’s Sustainable Growth Equity Fund was the only retail mutual fund with a core focus on high-impact themes.
In 2018, Addenda Capital broke ground when it launched the Addenda Impact Fixed Income Pooled Fund, which focuses on intentional and quantifiable positive impacts in the areas of climate change, health and wellness, education and community development.
Impact investments are also becoming more accessible to investors in private markets. CoPower and SolarShare offer green bonds directly to retail investors via their websites, while New Market Funds invests in affordable housing solutions and Deetken Impact provides exposure to impact themes in emerging markets. Kindred Credit Union offers the Oikocredit Global Impact GIC, which focuses on poverty reduction in low-income countries.
The road ahead
As the landscape of impact products continues to expand, financial advisors have a growing toolkit to meet the needs of investors who are seeking to make an impact. Indeed, there is still a long road ahead for addressing poverty, climate change and other great societal challenges. But the growth of impact investing brings cause for optimism, because many of the solutions will start with a single investment.