In April, I attended the Ecosperity Conference in Singapore. There, participants in the Impact Investing Roundtable were asked to discuss the current state of impact investing.
Among the various questions posed, one that garnered overwhelming consensus was: “Are we at a tipping point for impact investing?” Although I disagreed, I was relieved to find that more than three-quarters of him in the room shared my opinion. To solve a problem, the first step is to recognize it.
In the investment world, the term “inflection point” refers to a pivotal moment when significant changes occur that can lead to a period of dramatic growth. But when it comes to impact investing, there seems to be a constant looming expectation of reaching this critical juncture.
Despite growing awareness and interest in social responsibility and sustainable investing, key considerations for investors remain rooted in profitability and competitiveness. There are three main reasons for this situation. And here’s why we need to fundamentally question the concept of how investments are valued.
Profitability and competitiveness
First, impact investing continues to be perceived as having lower returns than traditional investing. This myth is frequently proven false. For example, McKinsey studied the returns of 48 different impact investments and found that the average internal rate of return (IRR) was 10%, and also found that the average IRR for his third of the investments was 34%.
Second, investments that prioritize social or environmental outcomes may lag traditional success criteria such as initial financial performance or market share. This makes them less attractive to investors looking to beat the market.
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While interest in impact investing continues to grow, impact investing is slowly moving towards becoming a dominant force in the investment world.
Third, social and environmental outcomes that result from impact investing, unlike clear economic benefits, can be difficult to measure or quantify. The lack of clear metrics makes it difficult for impact investing to demonstrate its value proposition in the short term, further hampering its appeal to mainstream investors.
The need for a paradigm shift
For impact investing to reach an inflection point, there will need to be a paradigm shift in how investments are evaluated, and it all comes down to getting the right data. Traditional metrics of profitability and competitiveness need to be expanded to include social and environmental impact. This requires the development of robust, standardized impact measurement tools that can provide investors with the data they need to make informed decisions.
Another proposed approach is the gradual embedding of ESG risk premiums into corporate lending rates and the increasing cost of doing business in unsustainable ways, such as Singapore’s carbon tax. It can be a tax (additional) to show in a material way. A modest proportion focuses on the major emitters.
We cannot continue “business as usual” for much longer. Over time, this will break through inertia, encourage a transition to more sustainable practices, and shift measures of commercial competitiveness (i.e. higher yield potential) towards more sustainable and profitable enterprises. It will help you tilt it.
In addition, investors should evaluate the strategies that funding recipients have in place to effectively scale up effective solutions within the allotted time frame. For example, Nandina REM manufactures circular carbon fiber and aluminum materials salvaged from decommissioned aircraft and reworked to aviation-grade specifications. We recognize that as important as creating a product is integrating it into global supply chains and markets.
That’s why we’ve been working with Qantas, Jamco America and other key aviation stakeholders to lead the creation of the Aviation Circularity Consortium and map out a certification pathway for circular materials back into aircraft. At the same time, we are working with financial institutions to develop fit-for-purpose financial products that enable multiple tiers of suppliers to incorporate certified materials into their processes and collectively move towards more sustainable supply chains. We are working on development.
While interest in impact investing continues to grow, impact investing is slowly moving towards becoming a dominant force in the investment world. The key investment considerations of profitability and competitiveness remain paramount, and until impact can be measured with the same rigor as financial return, we are unlikely to see significant changes.
But innovative approaches to driving change are taking shape. And as society and businesses become more aware of global challenges and methods of measurement improve, impact investing may eventually take its rightful place at the forefront of investment strategies.
