Why impact investment could soon be a trillion-dollar industry
By the end of the decade, impact investment has the potential to reach $1 trillion (£600 billion) and deliver significant social benefits, according to Jennifer Kenning, director of wealth management and spearhead of impact investing at US wealth management firm Aspiriant.
Aspiriant manages around $8 billion (£4.8 billion) and serves families with $1.5m (£900,000) in investable assets upwards. Over the last 24-36 months, Kenning says the firm has noticed an upward trend in the number of clients asking about impact investment opportunities and to be educated on the rapidly growing sector.
A relatively young form of investment, impact investors seek to have impact across a double bottom line – delivering both financial returns and social good. While the concept of investing for social good has been around for decades, it is only in recent years that the term ‘impact investment’ has emerged. The market has seen accelerated growth, with large financial players like Deutsche Bank, UBS and Goldman Sachs all interested.
“Impact investing is a way of putting money with purpose and driving your mission in a for-profit manner that could have far greater capabilities than in a traditional non-profit grant manner”, Kenning explains.
“I look at it from an infrastructure perspective; when you are trying to tackle the issues of clean drinking water, energy, housing, education and healthcare. These are very large infrastructure problems and, I believe, will take for-profit capital to be able to tackle the issues in a manner that is going to be to scale and in a reasonable amount of time.”
The benefits impact investment can have on society were put into perspective for Kenning during a recent executive immersion trip to Africa. She says not only did the trip highlight the difficulties families and communities go through, but also the challenges companies are faced with when trying to get goods and services to developing areas.
Kenning adds that over the last 50-100 years, we have seen that relying strictly on aid is not “moving the needle forward”. Therefore, she believes impact investment is uniquely placed to address the issue. “One of the most resounding things I got on the trip was that they want the opportunity, not the hand out”, she adds.
The impact investment market is currently worth around $50 billion (£30 billion) globally, but Kenning believes it has the potential to be worth $1 trillion (£600 billion) in the next five years. This is because the lines between investment portfolios and philanthropic objectives are becoming blurred and impact investing could soon be part of everyone’s asset allocation, she says.
However, Kenning adds that in order to achieve this, the industry needs to have the institutionalised process that there is in traditional markets – along with benchmarks, proper reporting, standardized language and due diligence.
Whilst that trillion-dollar figure represents only a small portion of the total amount of money in the capital market, this would have a huge impact on the global economy and well-being of the world’s population.
Kenning says, “I think that by 2020 we will start to see really great change from these investments and by 2030 we could have a significant impact on the people that live on less than $2 (£1.20) a day.
“I think once you have products, process and people behind impact investment, you will start to have outcomes and solutions.”
When it comes to investors, there is definitely demand. A survey published last year by the sustainable bank Triodos found that 3 million investors in Britain alone will consider investing in social projects this year. However, a lack of knowledge – particularly among financial advisers – is hampering further growth in the sector.
Kenning explains, “The clients trust the gatekeeper. If the gatekeeper isn’t going to open the capital, then it’s not going to flow
into the system.
“The demand is definitely there. There is not one client that I have spoken to that isn’t excited once you have walked them though it. The data says that 81% of clients would make an investment in impact investing if they understood it and their adviser was educating them on it.”
Interest in the sector is also expected to continue growing, as those under the age of 35 begin to inherit money from the baby boomers above them. The younger generation “tie purpose into everything they do” and operate businesses completely different from their predecessors, Kenning says. As a result, impact investment will be driven by the next generation who want to see social return and financial return exist in the same opportunity.
As well as a moral advantage, research demonstrates that impact investing can have a positive impact on financial returns. As a result, these types of investments can create a double bottom line and achieve both social benefits and attractive returns, something Kenning describes as a “win-win” for investors and society.
She added, “I also think that what you saw in [the financial crash of] 2008/09 demonstrated to investors that some impact investment portfolios hold up better due to the environments you’re investing in.”
When it comes to selecting where to place your money, Kenning urges investors to pick an enterprise or issue they are passionate about and connect with, as well as assessing performance and other benchmarks.
“A lot of our clients are really focused on domestic impact investment, for both social and environmental projects. I think clients want to adopt a model of really helping their local communities. They want to see the good in their back yard”, she says.
Many investors who focus on developing nations have other ties to the area, such as through travelling or operating businesses there, Kenning explains. Others opt for investing in these regions because they enjoy having their money – and therefore impact – on a greater scale than it would in domestic markets alone.
If the impact investment market continues to grow, it has the potential to change the financial world for the better, allowing it to address global challenges and benefit the whole of society.
Kenning concludes, “I think we have more to lose by not trying impact investment than by trying. We have to do something; we are running out of resources and we have a population that is continuing to grow; we have 7 billion people today and will have 9 billion people by 2050. We have to be able to feed them, provide them with water and give them opportunities.“
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