There has been an unsubstantiated concern that the twin objectives of seeking out environmental and social impact alongside financial returns may be incompatible. This view belongs to a different era.
In reality, finding those companies with a positive social or environmental impact is a powerful way to align an investment strategy with long-term structural trends in the global economy.
See also: – ‘You can’t have impact and improve returns’
It is perhaps understandable why this myth has built up. Markets go through periods where they rediscover some enthusiasm for cheap ‘old economy’ stocks with poor records on sustainability. 2022 was one of those years as fossil fuel companies found favour in the wake of the Ukraine crisis. However, this approach is usually subject to short-term market forces rather than long-term structural trends.
Impact needs to be measurable
Impact investing looks to find those companies that are solving some of the world’s most important problems. They need to be providing real answers to the problems of environmental destruction, social harm or inequality.
The impact of an individual company needs to be measurable: the tangible reduction in carbon emissions, the educational benefit provided, and the number of people brought into the banking system. It needs to be codified into a company’s strategy and targets and the incentives of its management team.
Where this impact exists, it brings vast opportunities for the companies involved. Solving these issues remains a significant priority for governments and policymakers, so companies addressing environmental and social concerns tend to operate in sectors that receive regulatory and financial support.
This has been seen with initiatives such as the US Inflation Reduction Act, passed in August 2022, which earmarked almost $400bn in federal funding for clean energy solutions. Similar initiatives have been created in Europe, the UK and across the world.
With or without this support, companies operating in these important areas have vast addressable markets and a long-term pathway of growth. Within the clean transport market, for example, it is estimated that the electric vehicle market will grow to $802bn by 2027, with an annual growth rate of 22.6%. Governments across the world have put in powerful incentives for manufacturers to create electric cars and for consumers to buy them, but the momentum is there anyway.
These trends are undeniable. For example, the drive for greener buildings comes from companies keen to meet their net-zero targets and provide a better environment for their workforce or tenants. Global building stock is expected to double in size by 2050 with all new buildings expected to incorporate net-zero technologies. Much of the existing building stock will also be upgraded.
Waste management is driven by public horror over pollution levels. The waste management market is expected to grow 54% by 2030 to $2.5tn, with the water treatment market expected to grow 62% by 2029. These problems will not reverse without action, and the cost of inaction is catastrophic — creating a powerful tailwind for companies with the right solutions.
Moving towards the mainstream
It also puts investors on the right side of regulatory change. Companies that pollute, neglect their climate risks or create social harm, face increasing regulatory scrutiny and significant fines. This raises their operating costs and threatens their social license to operate.
It seems vanishingly unlikely that governments will about-turn on areas such as pollution, social harm or environmental degradation, meaning these companies will have to change or risk obsolescence. Those companies leading on social and environmental impact will have a strong advantage over their peers.
Crucially, impact investing does not confine investors to small, high-risk businesses in nascent sectors. While some of the innovation, such as vertical farming, is happening within the venture capital sector, many of the trends in impact investing are now well-established. From green energy to electric vehicles and sustainable agriculture, the growth trajectory for many of the businesses operating in these sectors and industries is already determined.
Impact investing is moving beyond a niche investment category towards the mainstream. In 2022, the Global Impact Investing Network reported that for the first time, impact assets under management had topped $1trn. During times of economic uncertainty, the most vulnerable in our society usually suffer, but that doesn’t have to be the case. Far from being incompatible, it is possible to position a portfolio to align with investors’ moral compasses and create a more equitable world while also targeting strong returns.