Millennial investors have fuelled a 50% rise in the SRI market, but early-stage businesses have to be able to show they are contributing to positive change, not greenwash, says Triple Point’s Belinda Thomas
Businesses with a socially responsible aspect have never had it so good. Green is fast becoming investors’ favourite colour. A key factor behind this is the rise of impact investment. An evolution of earlier principled approaches to investment, such as ethical and social enterprise investing, it is sweeping countries and markets. With continually rising amounts of capital being committed to impact, it’s a source of potential funding that businesses with a demonstrable positive impact on society should use to power their growth.
Increasingly, investors want to do well from doing good. No longer is it enough for many that the investment schemes they commit to, such as ethical funds, just avoid social damage. Nor are they happy to give up a fair market return to support companies that make a positive impact, which is what many socially responsible funds offer. Impact investment funds back businesses that positively contribute to society but also allow investors to earn a market return.
Millennial investors are twice as likely to fund companies with social or environmental goals
Globally, bodies such as the Global Impact Investing Network have recorded a rise of over 50% in the size of the market, and estimates for the total impact investment market range into hundreds of billions and beyond. In the UK earlier this year, some 18 top fund managers committed to increase their impact investments, further boosting the prospects of a market that is already worth some £150bn. The government has also committed to improving transparency in this area, to encourage retail investors to access the sector, and announced a consultation on how pension funds can be stimulated to give more weight to social, environmental and governance factors in their investment decisions.
One of the factors driving this change is the rise of the modern “millennial” investor (see Millennials driving jump in ethical investment). Millennials are clearly influencing the worldwide growth of impact investing. Recent research from Morgan Stanley revealed that millennial investors are twice as likely as investors in general to fund companies with social or environmental goals and are putting money in sustainable investments at a rate two times higher than average, with 86% of millennial investors saying they are very interested in sustainable investing.
Partly this trend is influenced by the great financial crash, which has made millennials mistrustful of listed bonds and equities and more ready to commit their savings to alternative investments, such as early stage and green businesses. This trend is particularly pertinent given we are witnessing the largest wealth transfer taking place inter-generationally in history. Over the next 30 years, up to $30tn is expected to be passed from baby boomers to generation X and on to millennials.
What is also important to understand is that this approach is not simply catering to the investment philosophy of a cohort of more progressive, younger individuals. Triodos, the sustainable bank, recently found that nearly two thirds of UK citizens would prefer their money to support companies that are not only profitable but that also have a positive impact on society and the environment.
Early stage businesses that are making a positive impact on society are a natural target for impact investors. Investment in these businesses helps to broaden the asset allocation of a typical investment portfolio, helping investors diversify, de-risk and potentially boost their overall portfolio returns. A recent report from Morningstar and the Wall Street Journal, for example, shows that funds focused on sustainable investments have offered superior performance to non-sustainable investments over periods of one, three, five, and 10 years.
So how should companies position and best prepare themselves to attract impact investors? Probably the starting point is to have clear, measurable evidence of the positive social impact the business is making. Transparency in this regard is becoming increasingly important as investors become more intent on distinguishing between “greenwash” businesses and those that genuinely make a positive social impact.
Social impact companies should, like any other company, be ready to withstand a robust due diligence process
Securing a market return for our investors is a key component of our impact investment decisions, so social impact companies should, like any other company, be ready to withstand a robust due diligence process, as we focus on their revenue generation, growth strategy, market positioning and unique selling propositions.
Sectors where we think green businesses offer the most compelling prospects include: preventative health, which generates significant social impact by freeing funding for other, non-preventable health needs; waste recycling to cut down on the environmental damage done by landfill sites; online homecare, which helps address the traditionally high cost of homecare; and companies that address key inequality issues whether arising from gender, housing, energy or poverty.
The business of business will always be business, but those companies that recognize that increasingly they will be evaluated by their social and environmental contribution as well as their bottom line will be the ones that reap the rewards of the accelerating global trend of impact investment.
Belinda Thomas is partner and head of investor relations at private investment specialist Triple Point.
impact investing transparency greenwash Global Impact Investing Network