The lowdown on impact investing and how it holds companies to account

Many people aren’t aware of a groundbreaking shift in investment thinking and strategy that has occurred globally over the past two decades – particularly in the last five years.

This paradigm shift is simple to explain, but its flow-on ramifications are complex and are now trickling down rapidly, from the largest to the smallest investors.

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Once upon a time, the dual concepts of “doing good” and “making money” were generally seen as mutually exclusive, with investors consigning “doing good” largely to the realm of philanthropy, not-for-profit organizations, or government aid programs.

In 2021, this is no longer the case at all.

Today, a significant number of large and small investment funds are operating with the two concepts happily reconciled, proving it is indeed possible to create lasting social impact and make good commercial returns for their investors.

And that’s what impact investment is: creating measurable social impact while providing positive commercial returns.

Some key terms defined

Before we go any further, let’s define some of the terms that are now in daily use around the world.

ESG: Environmental and social governance refers to the three central factors – environmental, social, and corporate governance – in measuring the sustainability and societal impact of an investment in a company or business.

CSR: Corporate social responsibility is a framework for companies to be socially accountable to their stakeholders by measuring their economic, social, and environmental impacts.

SDG: The Sustainable Development Goals were set in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030. The SDGs are a collection of 17 interlinked goals designed to be a “blueprint to achieve a better and more sustainable future for all.”

The global paradigm shift

Citing research by PwC, Bloomberg reported in October 2020 that “almost 60% of mutual fund assets will be classified as ‘ESG’ by 2025.”

According to PwC: “While the term was originally coined in 2005, ESG emerged as somewhat of a buzzword following the implementation of the UN Sustainable Development Goals in 2015. Although impact investing and ESG investing were, back then, niche investment strategies, they marked the onset of a paradigm shift in the investment landscape, establishing the first voluntary link between sustainability and financial services.”

This shift, the firm added, represents “the growth opportunity of the century…”

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