Impact investing: Transforming capital to serve the common good

31 October 2024 by National Bank Investments
Coin stacks with various elements representing the energy transition and the environment.

Impact investing is an approach that is increasingly popular among investors seeking to combine financial returns with a positive social or environmental impact. This approach, though relatively recent, has rapidly developed into a pillar of sustainable finance. Here’s a look at this aspect of responsible investing that addresses the social and environmental issues of our time.

The origins of impact investing

Impact investing originated in the early 2000s with the emergence of a new generation of investors aware of global issues such as climate change, social inequality, and poverty. The idea of combining financial returns and positive impact began to take shape at that time.

The term “impact investing” was popularized in 2007 by the Rockefeller Foundation which supported the development of this field by funding studies and bringing together experts to define the criteria and objectives of this approach. Since then, impact investing has grown significantly with the support of financial institutions, foundations, and even governments.

Although the market is still modest, with less than 10% of sustainable funds in Canada considered impact funds¹, the potential is high and interest sustained.

How is impact investing different?

Impact investing seeks to achieve two objectives: The first is to generate a positive long-term return, like any other investment strategy, and the second is to create a positive social or environmental impact. To achieve this, asset managers look for companies offering products and services that contribute positively to certain ESG issues. To fit the definition of impact investing, two important criteria must be met: Intentionality and measurability.

1. Intentionality: Impact investors deliberately seek to generate a positive social or environmental impact in addition to financial returns. This intention is central to the investment strategy and guides the selection of companies or projects in which to invest.

2. Measurability: Unlike other forms of responsible investing, impact investing requires a rigorous measurement of results. Investors use specific indicators to assess the social or environmental impact of investments, which allows them to track progress and adjust strategies accordingly.

Examples of metrics used to track positive impact could include: Added renewable electricity capacity (measured in MWh), an increase in treated, saved or supplied water (measured in megalitres), or an increase in the number of affordable housing units.

For some, a third criterion must be considered. However, it is more contested and remains at the heart of debates on impact investing.

3. Additionality: Additionality requires demonstrating that the impact would not have been possible without the capital invested. Additionality advocates maintain that an attractive investment opportunity could also be realized without sustainable financing. For some, additionality implies that impact investors direct their capital toward less attractive investments and would therefore be willing to accept a lower financial performance or a lower risk-return ratio.

Case study - Nuveen

An example of an impact investment with a social bond

City of Pharr, Texas

Pharr is a city in southern Texas located along the Rio Grande and the U.S./Mexico border with a population of roughly 80,000.

In 2022, Pharr's median household income was $45,016 and 30% of the population lived in poverty.

Rural communities have long struggled to obtain adequate cellular and internet service, mainly because large national operators prefer densely populated centres that offer a much higher return on investment. Improved connectivity allows people in rural communities to have easier access to employment, education, training, and services such as health care.

Use of funds²

Fibre network built to provide broadband access to low-income households.

Size of the issue

$54.6 million

Impact³

  • 4,000 clients connected to high-speed internet (as of January 2024)
  • Monthly double-digit growth in subscribers and sales, with an average of 430 new connections per month.
  • The broadband services, which won awards from the Smart Cities Council and Broadband Communities Magazine, catalyzed $4.2 million in grants for the Pharr Connect Regional Digital Connector program.

Current state of the impact investing market

Today, the impact investing market is booming. According to projections, assets under management in this sector are projected to reach USD 7.7 trillion in 2033, more than double what they currently represent⁴. This growth is fueled by increased demand from institutional and retail investors who are increasingly concerned about the non-financial impacts of their portfolios.

Examples of sectors targeted by impact investing include renewable energy, education, health, infrastructure, and access to clean water. Investors are also increasingly interested in tech companies that offer innovative solutions to social and environmental problems.

The impact investing market still faces some challenges. Currently, standardizing impact measurement criteria represents a challenge since no universally accepted framework exists. Moreover, the perception of a trade-off between financial returns and social impact remains an obstacle for some investors.

A market with many possibilities

The future of impact investing looks promising, with a number of trends that should favour its expansion.

Firstly, governments and regulators are increasingly focusing on corporate transparency and accountability, which could help boost investor confidence in the impact investing market.

Secondly, technology will play a key role in the development of this sector. For example, artificial intelligence can be used to analyze complex data and identify high-impact investment opportunities. The fintech sector also plays a significant role in making impact investing accessible to a wider audience.

Finally, the rise of younger generations, who are more concerned about social and environmental issues, benefits impact strategies. Investors of tomorrow are more likely to favour responsible investments and their influence could accelerate the adoption of impact investing.

What can we conclude?

Impact investing has come a long way since its beginnings, from a niche to a fast-growing sector. With its distinctive features and potential for social and environmental transformation, it represents a new approach to investing. Challenges remain, but the outlook is encouraging and this sector is on track to gain even greater importance. For investors looking to align their investments with their beliefs, impact investing offers a unique opportunity to generate both a financial return and a positive impact on the world.

NBI strategies that integrate impact investing

Legal notes

1 National Bank Investments, 2024, based on CIFSC data

2 Global fixed income impact report 2023 

3 https://riograndeguardian.com/hernandez-internet-service-providers-chose-not-to-service-south-pharr/

4 https://www.thebrainyinsights.com/report/impact-investing-market-14024#summary 

5 https://www.thebrainyinsights.com/report/impact-investing-market-14024#summary

 

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