Five myths surrounding Impact investing

Executive summary:

• Sustainability and ESG strategies differ significantly and are at two ends of the sustainable investing spectrum.
• Impact investing is no longer a niche asset class, having witnessed exponential growth in recent years.
• Investors are not giving up returns for the sake of impact.
  
   

Sustainability is a term that has surged in prominence in the investment industry in recent years, but that doesn’t mean the sector is fully understood. This is no truer than in discussions surrounding impact investing which, despite its growing popularity, still carries many investment misconceptions around its purpose and maturity as an asset class. To help prospective investors, we have debunked five myths that surround the impact investing landscape.

Myth 1 – Impact investing is no different from existing Sustainability and ESG strategies.

One of the common misconceptions around impact investing is the conflation with existing Sustainability and ESG (Environmental, Social, and Governance) strategies. In reality, the two differ significantly, operating at two ends of the sustainable investing spectrum; ESG investing is a framework, while impact investing is a distinct strategy. 

At one end of the spectrum, there are investments that prioritise profitability over impact – here you find sustainable or ESG strategies focusing on understanding how an organisation manages risks and opportunities around sustainability issues. ESG strategies also tend to be based on backward-looking measurements of that investment.

At the other end of the spectrum, we have investments that prioritise impact over profitability - these are mostly philanthropic investments and are forward-looking in nature. In these cases, profitability is not prioritised, with projects typically featuring below-market returns, as well as donations or grants. 

Between these two ends of the spectrum, we believe Impact investing sits in the middle. Impact investing is made with the intention of generating positive, measurable social and environmental impact alongside a financial return, ‘Profit with Purpose’. Impact strategies also use the UN Sustainable Development Goals to identify investments that are working to address the world’s most pressing problems. These include themes such as financial inclusion, healthcare, affordable housing, education and expanding access to clean energy.

Myth 2 – Impact investing is still in its infancy and is too niche for many investors.

The perception that impact investing is an immature and niche asset class is a myth that obscures its transformative potential. Impact investing has witnessed exponential growth, surpassing $1 trillion in 2022, with 41% of all investors saying that they plan to increase their investments that are designed to have a positive community impact.¹  This trend is having a strong impact on the weight of prospective money moving into impact investing over the next decade.

The sector's maturation is also evidenced by the entry of large investment managers, investment professionalism, transparency, and means to trade into the sector. As investors increasingly seek tangible outcomes, impact investing is emerging as a resilient and future-proof choice. Fears of greenwashing are diminishing as the sector gains transparency and credibility. In fact, one significant reason for the sector’s growing popularity is that it allows investor to quantify what their money has achieved. For example: to provide capital to businesses that re-train out of work people, or to provide access to healthcare through reducing cost of treatment. 

Myth 3 – Impact investing can’t be quantified

The quantifiability of impact is questioned by many due to the relative youth of impact investing strategies. However, in reality, impact can be measured. While common standards are still evolving, a widely used tool is IRIS+, developed by GLOBAL IMPACT INVESTING NETWORK, which is a system investors can use to measure, manage and optimise their impact.  At the same time management and operational frameworks have been created such as Operating Principles for Impact Management and Impact Project Managements 5 dimensions of impact.

At Russell Investments, over the last decade, we’ve been investing in impact strategies, reviewing frameworks and standards, and have taken the best of what we’ve seen. For this reason, we believe a Fund-of-Funds approach is the ideal strategy for impact investing. As part of this, we have reviewed over 300 funds and established a framework for assessing managers. For the manager that makes it into the portfolio, we monitor their performance and impact throughout the lifecycle of that investment. We also undertake rigorous due diligence, ensuring that selected managers set clear impact Key Performance Indicators and monitor them throughout the investment lifecycle. 

Myth 4 - Is it true that investors must sacrifice returns with impact investments?

A misconception of impact investing is that it is just philanthropy in disguise and investors must sacrifice returns. In reality, investors are not giving up returns for the sake of impact, with the industry having been designed to target ‘Profit with Purpose’, achieving both impact and financial returns side-by-side. 

When looking at impact investments, we assess the financial viability as we would do with any other private market fund: we look at the investment’s business model, risks, competitive position, and how capital is allocated. 

We see a range of attractive opportunities for impact Investing across several structural trends including the energy transition, climate strategies, evolving healthcare needs, social disparity and financial inclusion. We see investments in these areas as standing to benefit from capital flows via governments, industries, and consumers, with the potential to make a positive impact on the world while achieving attractive financial returns.

Myth 5 - Does impact investing only focus on the environmental crisis and energy transition? 

Contrary to the belief that impact investing exclusively revolves around environmental concerns, the industry's alignment with the UN Sustainable Development Goals offers a diverse scope. Beyond climate action, impact investments span various sectors, including healthcare, social disparities, and financial inclusion. Impact investing emerges as a versatile tool, allowing investors to contribute to positive change across a spectrum of global challenges.

For example, evolving healthcare needs is an area we are particularly focused on, with numerous trends driving increased demand for healthcare over the coming decades. These trends include rising life expectancies, with UN estimates suggesting that by 2050 more than 16% of the global population will be aged over 60.² An older population will require greater spending on medical products and services as well as boost demand for healthcare solutions; via traditional solutions as well as new technology. Here we’ve invested in the development of new hospitals and care facilities, through to investments in med-tech companies that should not only provide long term returns for investors, but also facilitate positive change within healthcare.

If you would like to learn more about impact investing, please don’t hesitate to visit our responsible investments webpage.

¹ Fidelity Charitable https://www.fa-mag.com/news/millennials-pushing-impact-investing-growth-67403.html

² https://www.un.org/development/desa/en/news/population/world-population-prospects-2019.html

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.