Slaying five impact investing myths

On medieval maps, uncharted waters were sometimes marked with dragons, sea monsters and other mythological creatures to warn of potential dangers. Today, while certainly not mythical, modern-day dragons such as the menace of greenwashing plague our path to survival.

As humanity pulls together to tackle our most pressing environmental and societal challenges, we need to reframe our thinking. Navigating new territories requires us to adapt in order to thrive.

At Vontobel, we believe that impact investing offers opportunities to bring about positive change for society and the environment while also making financial returns. It’s the goal of our “double-dividend” concept. So why aren’t more investors already dipping their toes into the waters of impact investing? Let’s look at five common myths that can throw would-be impact investors off course. And while we’ve got our swords drawn, let’s slay those myths in the process.

Myth 1: Impact Investing is a small market

Impact investing may still be regarded by some as a niche activity, but despite its relatively small size the market has in fact experienced strong growth over the last few years. It is one of the few areas to continue its upward trend amid recent challenging market conditions.

Since 2016, the market share captured by actively managed impact funds versus all actively managed equity mutual funds has jumped from 0.4 percent to 1.14 percent. A particularly stellar period of growth occurred in the years 2019 to 2021, especially compared to general market movements. And although there were outflows in 2022/23, these were smaller than in the general market.¹

We have every reason to believe that the trend will continue and even strengthen, and Vontobel’s own 2023 Impact Investing Survey, of close to 200 professional and institutional investors globally, backs this up. Results show that, overall, impact investing is gaining increased market traction, with around two-thirds of respondents in the study already engaging in impact investing and many of the remaining third planning to potentially invest. Merely four percent are not actively looking into or investing or planning to engage in impact investing.

Myth 2: You can’t generate an impact with public equities

Impact investing has long been defined as investments that are made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

For many years, impact investing has been associated with private markets. However, a financial ecosystem that only includes private markets is incomplete, and public markets are an important part of the life cycle of companies that aspire to reach a certain scale.

For this reason, we’ve been part of the Listed Equity Working Group at GIIN (the Global Impact Investing Network) for more than two years. The network has more than 400 members globally and offers a platform to support activities, education, and research that help accelerate the development of a coherent impact investing industry. Our participation in the working group has been to help establish guidance on what constitutes an “impact strategy” in listed equity.

Pushing for wider discussion about the role of public markets in impact investing is the reason for our 2021 whitepaper “Make your money matter: creating impact through public equity” . Impact investing sits close to the core values of Vontobel and our heritage and, as Björn Wettergren, member of the Vontobel board of directors and fourth generation Vontobel family, writes in the foreword: “despite the huge scale of public markets we felt that impact investing in these markets hadn’t been widely discussed and placed in a broader context”.

Indeed, over the past decade impact investing via the stock markets has attained the required critical mass, scalability and global reach to help tackle the challenges facing the whole planet. As the whitepaper outlines, public equities achieve impact in two ways:

• It starts when impact investors favor companies that help reduce environmental footprint or improve social welfare, bolstering the firm’s financial solidity. Investors also vote in annual general meetings and engage with company management, encouraging them to grow impactful businesses or do targeted research into beneficial products and processes.
• The second step comes when, thanks to these allocation and engagement effects, the targeted companies get easier access to capital to grow their businesses faster, making them better positioned and more motivated to finance innovative research and development that could ultimately generate more impactful revenues.

The combination of both effects creates a positive feedback loop: the more successful and sustainable companies are, the more investors will support them. This can only accelerate the momentum towards a better world.

Myth 3: You have to sacrifice return to do something good

Some investors may associate impact investing with being forced to give up on returns. This doesn’t have to be the case. Financial and non-financial returns are considered equal in Vontobel’s approach to impact investing. And impact investing offers a massive opportunity for investors right now.

Let’s get structural and talk about return potential. For the world to reach its net zero targets by 2050, a significant ramp-up in energy transition capital investment is required. BloombergNEF estimates that global annual investment needs to triple throughout this decade in order to achieve a net zero emissions world by 2050, quantifying this as a USD 2 trillion investment opportunity – the equivalent of about two percent of annual global GDP.

What will this money be spent on? Of the USD 195.7 trillion price tag, USD 109.0 trillion is required to transform how we consume energy through the purchase of heat pumps, electric vehicles, and sustainable recycling. The remaining USD 86.7 trillion is directed to energy supply assets, including grids and carbon capture. Investment in low-carbon power, such as wind and solar, accounts for most of the capital spending.

What does this mean on a country level? Putting net zero into practice at a country level requires a combination of electrifying transport, homes, and power grids, alternative clean energies such as hydrogen, biomass or new nuclear, reducing fossil fuel use, and building out carbon capture projects where necessary. Considering the scale of these requirements for an economy the size of the USA, this could require investment of USD 2.5 trillion to 2030, and USD 10 trillion by 2050 (source: Princeton, Net Zero America).

Myth 4: Impact Investing in public equities is all wishy-washy

The way to bust this myth of wishy-washyness is with clarity, transparency, and rigor. Since 2020, Vontobel has been a member of the Global Impact Investing Network (GIIN) and actively participated in the working group that has defined stringent global standards for impact investing in public equities. The guidance issued by this working group stipulates certain standards: impact investing should have a clear strategy (including intentions defined), as well as portfolio design and selection aligned with strategy impact objectives. It should also set engagement priorities based on portfolio strategies and objectives, and use performance data to ensure measurability.

At Vontobel, we regularly and openly report on our sustainability commitments and impact achieved through our activities, including impact investing. We launched our first fund consciously aiming to reduce the environmental footprint of our investments more than 14 years ago. Since then, our dedicated team has consistently focused on improving and refining our efforts to measure and report our impact.

We believe that we can drive change by investing in companies that address today’s most pressing global challenges on both the environmental and social fronts – and we back this belief up with transparent explanations of how we select and monitor such companies and their impact. The article, Reap what you sow: seek to harvest your “double dividend” provides a more detailed look at our stringent appraisal, measurement and reporting framework, which is underpinned by clear, precisely defined terminology and clearly specified impact indicators.

Myth 5: There are no reliable data to measure positive impact

While poor standardization of terminology and data in impact investing remains a bugbear across the industry, efforts are being made to bring consistency. The GIIN working group on impact investing in public equities considers the use of performance data a core characteristic of impact investing. This entails the application of techniques to evaluate impact performance beyond relative measures of peer performance and considers whether activities and outputs of companies are contributing to real-world change.

At Vontobel, we intend to walk the talk. We are zealous about taking a systematic approach with a proprietary and consistent framework that helps us measure potential impact, backed by IT, and emphasizing transparent reporting, including third-party verification. But what happens when data is not always available from the companies we wish to invest in? In such instances, we engage directly with company management. This makes it possible to gather reliable data in a transparent and systematic way over the entire cycle of an investment. This proves particularly valuable given that impact investing is about change within long time horizons: A “snapshot” of how a company is doing in any given moment is not necessarily an aid to recognizing whether its overall direction of travel is right.

Our impact reports outline the full methodology, provide all assumptions used and disclose the limitations of our proprietary framework.

1. Source: Broadridge, June 2023, actively managed European / cross-border mutual fund AuM and flows. Impact funds: Broadridge universe: RI – Screened – Impact investing, equity funds only.

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