Study reveals growing demand for impact investing among retail investors
As more people look to make a positive influence on society and the environment with their investments, impact investing is becoming an increasingly common practice among retail investors. The size of the impact investing market has grown by 42.4 per cent and as of last April is worth USD715 billion, compared to USD502 billion in 2019.
Looking into the foreseeable future, the Environmental, Social and Governance (ESG) investment market is set to double this year, as more investors plan to move funds to support companies with a positive ESG rating or impact. The study by OnePlanetCapital revealed that the shift has already begun—with a tenth of all investors already holding ESG investments at present time. Looking ahead, the market is set to double this year as over 1 in 10 investors, who do not currently invest in ESG plan to move investments to ESG related funds in 2021.
Around the world, more and more people continue to allocate their money in ways that both create a financial return and respond to global challenges like climate change, disease, and the rising inequality issues.
The term “impact investing” was coined in 2007, when a group of investors met to explore a new investment concept that could simultaneously affect social and environmental change. In parallel, a number of similar investment strategies have evolved, including ESG investment strategy that recently has seen rapid growth.
ESG is a term used by investors to evaluate corporate behavior in order to determine the future financial performance of companies. ESG investing is the systematic incorporation of environmental, social and governance factors into the fundamental investment decision process.
Projected to be a more holistic approach than traditional investing, ESG integration is often pursued as a means of improving investment performance based on the belief that i.e. environmentally conscious business will outperform their peers. ESG assessment is commonly used in public market strategies and can involve screening-out investments that do not meet ESG criteria, yet ultimately focused on profitability, as the ultimate determining investment factor. ESG criteria allows for more stakeholder advocacy because they force companies to track and report how they are doing with regards to a range of topics, including issues such as pollution and worker safety, which resembles support for action driven corporate responsibility.
Impact investing is known as a more progressive form of sustainable investment, as it seeks to generate measurable social and environmental impact, balanced with financial returns in equal measures. As such, impact investing at present is commonly applied in private markets strategies that intentionally seek investments that contribute measurable solutions to global challenges like the United Nations Sustainable Development Goals (SDGs). Impact investing is practiced by individuals and institutional investors such as hedge funds, pension funds, and non-profit organisations.
Both can deliver and work together. For example, most impact investors will screen for, and manage ESG risk as part of their investment practices. And ESG investing can generate meaningful positive impact when corporate leaders change their behaviour because of those pressures, or when those pressures create a big enough influence on capital markets to lower the cost of capital for firms generating positive impacts.
Although ESG and impact investment are becoming common practice for institutional investors there is still a shortage of scalable products for the growing base of retail investors to choose from.
Namir Yeroham, Senior Business Development Manager at Fundsquare holds that there is large interest in green bonds and ESG investment among retail investors. “The new generation is looking for something more appealing to invest in. They are looking for filters, ratings to make sound ESG investment decisions. Companies like Morningstar are starting to open up more data that is accessible to both institutional and retail investors.”
Despite the fact that there are more ESG criteria reporting sites, there are still only a few accessible options for individual investors. In a recent survey almost a third of the surveyed advisors said that retail investors lack ready-made impact opportunities. This makes the range of impact investment products crucial for the growth of the market.
One key area of impact investment that has been gaining traction lately are alternative investments. Alternative assets are known for their accessibility to retail investors and multiple ways to make relatively fast impact.
One example would be impact tokens—a blockchain based solution for impact investment. This group of tokens has a specific goal of unlocking investments for projects with positive social and environmental impacts in support of the SDGs and they are starting to gain traction because of inherent transparency of blockchain technology. One example would be Fishcoin, a UN World Food Program supported token, which is improving traceability and sustainability of seafood supply chains by allowing buyers to follow a fish's journey from its origins, rewarding fishermen for recording fish travel data. They are financed by wholesalers, who need the accurate data.
Another example would be investment in loans asset class. Mintos, a marketplace for investing in loans, houses small and medium enterprise lenders that help customers in underbanked countries like Uzbekistan or Mexico to secure loans for cars, tools or other means for their business to grow. Retail investors can finance those loans and thus open the access to credit where it is unavailable. Some lenders concentrate primarily on women entrepreneurs, thus encouraging gender and social equality in business, which is an important aspect of impact investing. In total, almost EUR6.3 billion have been invested into loans on the platform by over 390 thousand investors to this day.
“Investing in loans has a great potential to help close the financing gap,” says Martins Sulte, CEO at Mintos. “This is simply because there are incentives to do that, as the return rates are anywhere between 9 per cent to 15 per cent per year, which is high enough compared to traditional assets. It is a win-win situation for everyone, but especially those in emerging economies.”
With awareness of financial disparity and other inequalities growing and impact investors satisfied with their returns, it is expected that impacting and ESG inspired-investing will continue to grow and expand the product suite.