The evolution of investing: A growing public conscience

Posted on September 17th, 2018 | Categories - Investments, News

More investors are exploring impact investing, reflecting wider changes to the way we consider the effects of our decisions. Research from high street bank Barclays suggests that it’s the millennial generation that is driving the shift in attitudes.

However, for impact investing to move into the mainstream, it needs to engage baby boomer investors. Making decisions that have considered different aspects, from their impact on communities to the environment, has been a growing trend. Ethical shopping, for example, has increased significantly in awareness since the turn of the century and now it could be the turn of investment.

What is impact investing?

The first question to tackle is; what is impact investing? It is a subjective topic and there are often different terms used interchangeably to describe the same process. You may have heard the terms ‘ethical’, ‘sustainable’, ‘responsible’ or ‘ESG’ used in relation to investment and, while in some cases they may be defined slightly differently, they broadly mean the same thing.

In basic terms, impact investing is an investment process that seeks to have a positive influence. Rather than just the financial return being considered, the impact it has is weighed up too; a double bottom line if you will.

Impact investments can become complicated, as we all have different priorities and values. What you may consider an ethical practice or worthy causes can differ vastly when compared to another investor’s viewpoint. As a result, the criteria for deeming what an impact investment is can be tricky to pin down.

The research from Barclays looked at what the most important causes for impact investors were, highlighting the varied range:

  1. Health
  2. Water and sanitation
  3. Education
  4. Green energy
  5. Environment
  6. Housing
  7.  Agriculture and food
  8. ICT
  9.  Financial inclusion
  10. Arts and culture

The array of causes that you can support financially means you can pick out those investment opportunities that match your personal beliefs. This is reflected in 66% of impact investors choosing to place their investable assets into organisations or funds that they have a personal connection with.

As with all decisions, including financial ones, there are a range of different motivational factors for incorporating values when making life choices. The Barclays research revealed the top ones were:

  1. Family security
  2. Wisdom
  3. Social justice
  4. Personal achievement
  5. Financial wealth
  6. Making a difference in the world
  7. Supporting my community
  8. Unity with nature
  9. Authority

Along with the leading motivators and causes, the Barclays research also looked at who was most engaged with impact investing. It discovered that younger generations were more likely to look beyond just the financial return of an investment but that overall impact investment is growing.

  • 43% of respondents under 40 had made an impact investment, compared to 9% of those aged 50-59 and just 3% for over 60s had
  • 32% of family office and foundations’ first impact investment were proposed by family members aged 33-55, just 18% were put forward by those aged over 55
  • Those aged under 30 would allocate three times as much of their portfolio to impact investment than those aged 60 or older

Two years ago, 9% of investors said they’d made an impact investment, this has since risen to 15%. While still a modest portion of the market, it does show that impact investment has the potential to move into the mainstream. Furthermore, 56% of investors said they were interested in exploring impact investment and 90% of those that had made an impact investment in the past were likely to do so again.

One of the key takeaways from the Barclays research is that if impact investing is to become the norm, it needs to engage and attract older generations.

Damian Payiatakis, Head of Impact Investing at Barclays, said, “Younger generations are more naturally comfortable combining financial and societal ambitions when investing. However, it’s the older generation who have more investible wealth today and whose choices help shape the investment markets and the world their children and grandchildren live in.”

Considerations for impact investment

There are a lot of reasons why impact investment is appealing, with the positive effect your money can have often at the top of investors’ lists. But, on the other hand, there are some serious considerations that need to balance this too.

1. Financial return: 82% of investors would expect close to, or above, market returns if they were to make an impact investment; the financial return is still important alongside the impact. While all investments carry an element of risk, this is often a greater concern where impact investment is considered. The research from Barclays indicates there is no greater risk with ethical investment, but it can still be a worry.

2. Less choice: Ethical investment is growing but it’s still very much a niche market when you look at in relation to the market as a whole. Impact investment isn’t considered mainstream and, typically, that will mean you have less choice.

3. It’s subjective: As we’ve already mentioned, ethical and impact investment is highly subjective. You could, for example, find a fund that broadly matches your ethics and values only to find that you don’t agree on one key area; do you accept this or search for another fund? For this reason, finding impact investment opportunities that perfectly align with your ideals can be a challenge and it’s a good idea to prioritise causes.

4. Fees: With ethical and impact funds requiring a deeper level of regular monitoring, you may find that fees can be higher to offset this. It’s an area to consider when weighing up your returns.

5. Diversification: If you choose to negatively screen out investments in some industries, it could affect the diversity of your portfolio, placing you at risk. If you opt for negative screening, it’s often advisable to focus on a few core areas. Alternatively, you can allocate a portion of your portfolio to positively screen businesses that support your values.

6. Quantifying impact: If the impact your investments could have are a core motivation, you may want to quantify the effect your money is having. This can be a challenging task and it’s often difficult to understand exactly what your investments are funding and their impact.

The type of investment which best suit your needs and attitude to risk will depend on your personal circumstances and can only be determined through a one-to-one consultation. There is no guarantee that ethical investments. Please get in touch with us for further guidance.