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Impact Investing - Friend or Foe?

Climate change, environment, pollution - all seem to be catch phrases now more than ever. Abbreviations such as SDG or the ESG gap are all over the internet and news. Even Davos, the world economic forum, had a very strong theme – climate change. By now almost everyone should be familiar with Greta Thunberg. Her activism and her straight to the point speeches have gone viral, inviting leaders to divest from fossil fuels now and not by 2030.

More people are looking into options to contribute towards the more sustainable future, by taking trains instead of flying, eating less meat and some would rather invest in environmentally friendly companies. But is investing with impact that easy? Are there a lot of options to choose from? And of course, the main question remains, how can you be investing only in “sustainable” companies and will you be able to make profit?

In 1970 Milton Friedman declared that a corporation’s only responsibility was to maximise profit for shareholders. 50 years later we are facing the externalities caused by short-term profit creation: environmental degradation, social inequality and resource scarcity which cannot be ignored. We are not in 1970 anymore, businesses are now realising that long-term profitability requires sustainable business models which create value for all stakeholders. More companies are adopting hybrid business models where positive impact is directly correlated with profit – doing well by doing good.

Impact investment is capturing the growing attention of mainstream investors, and everyone is increasingly hearing and talking about it. GIIN survey states that there is now $228 billion in impact investing assets which is roughly double that of last year and it keeps growing.

Impact investing is here to stay and to grow exponentially over the next decade and beyond. It is simple, our future depends on it and people are understanding this at last. But are the investments profitable? There is a lot of research stating analyzing it.

According to Eccles, Ioannou, and Serafeim, 2013 “Stocks of sustainable companies tend to outperform their less sustainable counterparts by 4.8% annually”.

Deutsche Bank analysed 56 academic studies and found that companies with high ESG ratings have lower costs of debt and equity; 89% of the studies show that companies ranked high on ESG outperform the market in both the medium term (three to five years) and long term (five to ten years).

This all shows that when it comes to true impact investing, there is no trade-off between profit and social impact because the two elements seem to be positively correlated.

The global economic crisis left a big impact on the investment world and trust in the financial market. It’s going to be a long time before people forget the financial catastrophes of the past few years. However, hopefully that encourage people to do things differently this time. Telegraph panellists say that responsible investing could present a welcome alternative from the traditional way of doing things.

In the current market there are several ways for investors to start investing sustainably. Each is different in it’s own way, thus it is important to choose the most suitable option for you. Consult with a financial advisor, do it yourself or use a robo-advisory app that does the research and trading for you. The essential part is that you, as the investor, are fully informed on where your investments go, and which companies you are investing into. Ensure that you make the right choices for you, and your future.

 

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Domile And

Domile And

Financial Analyst

BAEX Securities/ Cyan Reef

Member since

15 Mar 2019

Location

Amsterdam

Blog posts

3

This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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