Today’s investment strategies vary from the traditional. Investors are changing the factors that inform their investment decisions, now integrating impact considerations. What are impact considerations? They refer to considering the environmental and social impact of an investment before making the investment; this is also referred to as impact investing. Impact investing, therefore, is making investment decisions that in addition to leading to financial gain would have beneficial social and environmental effects.
Asset owners and managers need to assess the potential financial performance of an investment decision before investing, with the intention of maximizing returns. However, this is not the only consideration; with the growing need to be aware of the implications of an investment decision, investors also need to enquire about the use of proceeds and link their investment capital to the impact it could have on sustainability.
How is impact investing benefiting investors and corporates?
Impact investing has emerged as a powerful tool encouraging companies to adopt sustainability in their operations and strategies. As companies are driven mostly by the objectives of their investors, investors now shifting towards impact investing is prompting companies to invest in reducing their negative impact on the environment and society. By targeting investments that support impact objectives, investors aim to achieve more than just financial returns. Investment in funds that have a positive sustainable impact would be more beneficial in the long run, both for the investor and the company, considering the global shift to sustainability.
The power of impact investing should not be underestimated. For asset owners and managers, it aligns with sustainability and reducing their carbon footprint. It differentiates a company, unlocking the potential for long-term profitability and value creation.
Practices for impact investing
Impact investing is not a new concept. With ESG becoming a mainstream investment strategy, investors’ key drivers are becoming more diverse, including ESG considerations and managing the ESG-related risks of an investment to maximize financial return. When managing risks, investors need to consider the ESG impact of an investment and the big picture of how their investment will contribute to the global goal of a sustainable future. Thus, ESG risk and impact considerations are crucial to making a responsible investment decision.
Investors may consider ESG factors as a part of several considerations in investment decision-making; this is called “impact-focused investing”. Being focused solely on ESG considerations as driving investment to effect a real change is called “impact investing”.
Impact-focused investing considers the positive or negative impact the investment fund’s activity will have on the environment and society. Investors seek companies raising funds to create a positive impact. Under this approach, they generally view the impact of a portfolio as a whole and not as individual fund allocation. Impact investing, on the other hand, values the change the fund effects, with a measurable, positive impact on the environment.
Key Practices
Conclusion
Impact investing is a growing concept, motivating investors to be more aware of the environment and society. There is an increasing need for awareness to have a credible and responsible investment strategy that considers the impact of an investee company from a sustainability perspective. Investors also need to examine investments for signs of greenwashing (efforts to mislead them into believing the company strives to contribute positively to the environment and society).
By supporting companies engaged in worthwhile causes, investors can encourage companies to adopt practices that reduce the negative impact of traditional business activities. It would also be more beneficial financially in the long run for investors to invest in companies that meet their impact objectives, as the transition to sustainability is inevitable and would become mandatory. Investors need robust data and insight into a company’s operations to analyze the impact of its activity. Gunung Capital provides investors with impact solutions that align with their impact objectives.
