In theory, impact investments are supposed to harness the butterfly effect, a modest investment on one end of the world creating a positive ripple on the far side of the planet. This belief might have been overly optimistic, however. The evidence indicates that impact investment remains predominantly a localized endeavour.
Although impact investing has witnessed significant growth in recent years, owing in part to the EU’s SFDR classification and the increased credibility of ‘listed impact’ strategies, it cannot be asserted that capital is effectively flowing to where it is most needed to support the UN’s sustainable development goals – at least not yet. The question arises: will it ever?
Perhaps the key to resolving these disparities lies in confronting another fallacy that most of us know shouldn’t exist: the notion of a “free lunch.” Surprisingly, many active investors persist in believing they are uniquely entitled to one. Among impact investors, opinions diverge: some acknowledge that achieving impact may come at a slight cost in terms of performance, while others contend that impact and superior returns can go hand in hand, with no trade-off involved.
What we come to understand is that reconciling these differing claims hinges on how we define the investment universe. When scrutinizing companies committed to making a positive impact, skilled managers can select those with the most promising financial outlook. Over time, they have the potential to outperform the broader market, as their chosen investments succeed in realizing their objectives and outshining their less impactful peers.
What about the less financially enticing impact opportunities? Should they be summarily dismissed as unviable investment targets? This is a fundamental question that divides impact investors. The very definition of fiduciary duty lies at the heart of this debate. An investment that does not maximize returns for a given level of risk is out of scope for most institutional investors. Humans are, unfortunately, poorly equipped to project risk in the long term. We tend to overestimate risk of out-of-sight activities and underestimate the risk of not acting today.
To address our global challenges, we need to harness our fear of the unknown and let the butterfly free. Impact investments may seem risky, but the lack thereof could be far more dangerous.
Tired of flipping the book? Access individual articles or download the pdf here!
1. the editor’s word: let them fly
2. Going Sustainable with Green Bonds, by Philippe Kybourg, UBS Asset Management
3. Cardano and CFM, an Impactful Collaboration, an interview of Sebastiaan Masselink and Georges Beukerink
4. An Evolving EM Strategy for a Changing World, an interview with Fiona Manning, Premier Miton
5. The Impact Benefit of Scaling SMEs in Africa, and interview with Zain Latif and Isaac Marshall,TLG Capital
6. The Rocky Road to Nature Based Impact, by Richard Tyszkiewicz
7. Gauging the Impact Investing Landscape with GIINsights, by Julia Axelsson, CAIA
8. Asset Owners’ Perspective at the 2023 GIIN Impact Forum
9. Can Sustainable Investors Help the Homeless, by Filipe Albuquerque
Tired of flipping the book? Access individual articles or download the pdf here!