Impact investments are defined as investments made into companies, organizations, and funds to generate social or environmental impact and a financial return. According to GIIN, the Global Impact Investing Network, “Impact investing, which may be thought of as both a movement and an industry, can catalyze changes that are reshaping the relationships between people and financial markets.”
Some call it socially responsible investing. Others call it social-impact investing, or just impact investing. Still, others call it ESG (for environmental, social and governance) investing. Whatever you choose to call it, here are five trends that occurred in 2020 using these types of investment strategies.
5 Trends in Impact Investing
1. Social entrepreneurs step up
When the COVID pandemic became a global crisis in February and March, social entrepreneurs stepped up, as they are uniquely positioned to help low-income and underserved communities cope.
One example is the fintech startup Propel with its Fresh EBT app/platform that helps beneficiaries check their food stamps balances using their electronic benefits transfer (EBT) card, get grocery discounts and find employment.
In March, Propel teamed up with nonprofit GiveDirectly on a pilot program that sent payments of up to $1,000 to households receiving Supplemental Nutrition Assistance Program (SNAP) benefits.
A few months later, this Covid-19 Relief Fund pilot turned into Project 100, a large-scale cash assistance campaign, led by GiveDirectly, Propel, and children’s education advocacy group Stand for Children, to provide $1,000 in cash directly to 100,000 families in need.
2. Accelerators tackle racial inequality
In the spring, there were massive protests in response to the killings of George Floyd and Breonna Taylor. This was exacerbated by the disproportionate impact of Covid-19 on communities of color. This led many social enterprise startup accelerators to increase their program offerings targeting diversity and racial justice.
Austin-based DivInc was founded in 2016 to bridge the gap between underrepresented tech entrepreneurs and the resources needed for success. The company added a more targeted focus on racial disparity in criminal justice, healthcare, education, voting, or housing in August with a Social Justice Innovation Accelerator program.
The new program grew from conversations between founder Preston James and DivInc’s board of directors about how the organization could best address the problems revealed by Floyd’s killing.
Another example is Cox Enterprises Social Impact Accelerator powered by Techstars and their transition from startups addressing social and/or environmental challenges to those targeting racial and social justice issues. Managing Director Barry Givens commented that “we realized that, if we took all our energy and put that behind companies solving social justice and systemic racism problems, we could contribute to real change in our country and our world.”
Finally, Echoing Green, a global nonprofit organization supporting emerging social entrepreneurs, announced a $50 million Racial Equity Philanthropic Fund that will include funding for existing Echoing Green enterprises and new startups, in addition to other activities.
3. Millennials looking to make a social impact
Millennials today are at the threshold of their peak saving years, and many have a strong belief that the companies in which they invest should go beyond profit-making and become part of critical solutions for societal problems.
Also, younger generations are changing the workforce by demanding higher standards from their employers and shifting the focus of capitalism from self-interest to the wider good.
Impact investments have significantly outperformed traditional investing during the coronavirus pandemic. Greater numbers of younger investors realize they can make a difference in the world with their investing dollars.
In a recent global survey conducted by the deVere Group, a remarkable 77 percent of Millennial investors said that environmental, social and governance (ESG) issues are their top priority when assessing investment opportunities. Scrutinizing companies for their social responsibility is now a mainstream investing trend and record amounts of cash flow into these funds.
In Business Insider and Insider Intelligence’s recent Master Your Money Invest & Thrive Survey, 47% of millennials identified as investors. Among them, 34% said awareness of new investment apps influenced their decision to start investing.
During the height of the coronavirus outbreak in the U.S., Robinhood opened roughly 3 million new accounts on its platform. The company said half of those investors were first-timers.
New research shows that Millennial spending and investing during the Covid-19 pandemic are dramatically different from how Millennials managed their money in 2019.
According to a survey of more than 2,000 Millennials conducted by Money Under 30, the majority have recently shifted their attention towards securing their financial futures. The survey found that most are limiting expenses, optimizing their savings, and expanding their investment portfolios.
Finally, younger generations of investors – especially millennials – remain at the forefront of this movement. Sustainable investing divisions are among the most sought-after positions by new recruits joining leading investment houses.
4. CDFIs rescue small businesses
In response to the pandemic, more than 1,000 community development financial institutions (CDFIs) in the U.S. became lifesavers for small businesses. These institutions lend to small companies, schools, health facilities, and affordable housing projects and served on the front lines of the economic crisis. As a reward for their effectiveness, CDFIs were given $10 billion in the second round of the Paycheck Protection Program, significantly more than the $3.8 billion in the first iteration.
For example, LISC, one of the country’s largest CDFIs, raised a $100 million fund to help small businesses and community organizations impacted by Covid-19. Many foundations within CDFI loan portfolios also lowered interest rates or provided interest rate holidays.
5. ESG investing takes off
According to investment research platform Morningstar Direct, in the first four months of 2020, investors poured a record of a least $12.2 billion into funds that say they invest in environmental, social and governance practices. That is more than double the amount that ESG funds attracted during the same period last year when the U.S. was in the middle of its longest-running bull market in history. This is the latest evidence that ESG investing is more than a bull market trend.
Impact investing has significantly outperformed traditional investments during the Covid-19 pandemic and maybe the turning point for wealthy investors looking to generate change. According to RBC Capital Markets research, over 64 percent of actively managed ESG funds beat their benchmarks versus 49 percent of traditional funds through the first week in August.
“Every time something goes wrong in the world, it’s a boost to impact investing,” said Nancy E. Pfund, a managing partner and co-founder of DBL Partners. “There’s a generalized frustration that whatever people have been doing for the last X number of years, it’s not working.”
Ms. Pfund further commented, “this has caused a shift in strategy. You’re seeing people flock to impact investing, and now there are the returns.”
Private markets are experiencing similar interest. Take Vital Farms, a business located in Austin, Texas that sells eggs from pasture-raised hens. “A few years ago, venture capitalists scratched their heads at an egg farm,” commented Dave Kirkpatrick, managing director at SJF Ventures, an early private investor. Now, Vital Farms, having grown through private investment before going public in July, is valued at more than $1 billion.
Other investors are now asking Mr. Kirkpatrick’s advice about sustainable and profitable agriculture, who is also a founder of Impact Capital Managers. This trade group highlights impact investing as a viable way to achieve higher returns.
Impact investing is growing exponentially, and companies are using it to support entrepreneurs, further their social goals, and reach comparable financial returns on their investments. These investments are yielding real-world impacts that are improving the lives of countless individuals globally.
Impact Investing Trends 2021
Experts agree that impact investing can produce positive results for investors, companies, and the social entrepreneurs they support. As we enter a new year, here are significant impact investing trends to look for in 2021.
- Climate solutions, including low-carbon investment opportunities, will gain even greater importance.
- Biodiversity and water pollution will receive greater attention from the government, academic researchers, and investors.
- ESGs (environmental, social, and corporate governance) will continue rapid growth and mainstream investor acceptance.
- Standardization in reporting ESG data to prove environmental impact versus greenwashing.
- Increased integration of sustainability considerations into investment processes.
- More companies will publicize information about their racial makeup and make diversity and inclusion a priority as required by investors.
Photo by Joshua Sortino on Unsplash