Three reasons to invest in positive change

“It is in your hands to create a better world for all who live in it” – these are among the many powerful words spoken by Nelson Mandela.

At Vontobel, our focus is on empowering investors to build better futures. And, in a rapidly changing world plagued by social unrest and a climate emergency, we believe impact investing is key to solving global challenges that will define the future for generations to come. As such, we see impact investing as both a responsibility to our clients, but also part of our general social accountability to understand, share knowledge, and provide access to impact investing.

But what drives other impact investors? Earlier this year, we asked almost 200 institutional and professional investors in Europe, the US and Asia for their views on impact investing in the 21st century. The results of Vontobel’s 2023 Impact Investing Survey confirmed one conclusion we’d already reached during our own long experience in the field: There is no “standard” impact investor, just as there’s no one-size-fits-all approach to the subject of investing with purpose. But in the midst of this variety, patterns do emerge. Here are three motives that many respondents shared as being among their key reasons for choosing the path of impact:

1) Profit with purpose

The concept of impact investing is simple: when capital is directed towards businesses that have a positive impact on the environment and/or society, investors can seek the two-fold goal of achieving financial returns along with doing good for our planet.

When it comes to profit with purpose, understanding the real-life impact of your investment counts. We use a proprietary and systematic approach, backed by a database, helping us to measure potential impact. We keep investors regularly informed, emphasizing transparent reporting, including third-party verification.

We also want to keep investors at the forefront of impact investing. Instead of merely responding to change, we actively anticipate and adapt to shifting environments. We’re always on the lookout for the companies we believe are best placed to benefit from these powerful trends – those that provide products and services that will drive innovation and change across a wide range of industries.

What investors told us in 2023 on profit with purpose:

• Most investors attach strong importance to both profit and purpose, which they think go hand in hand. Almost half (46 percent) say making a positive impact from their investments is as important as generating returns.
• “For me, it’s being able to generate positive investment returns for clients alongside a positive environmental and/or positive social impact,” says a partner at a US financial advisory firm.

2) Financial returns

Financial returns are part of the “double dividend” concept of impact investing: the ability to make a positive impact while generating a financial return. Although still a relatively small market compared to other investment strategies, the combination of social and environmental pressures facing humanity means that innovation is urgently needed to tackle these challenges. The potential for growth in this market – in companies creating innovative and scalable products and services – is poised to take off.

What do the numbers say? The next ten years are often referred to as the “decade of delivery” for the United Nations Sustainable Development Goals (UN SDGs). The UN Conference on Trade and Development (UNCTAD) estimates funds dedicated to investment in sustainable development will grow significantly from the current 1.3 trillion US dollars globally . In the race to net zero by 2050, a significant ramp up in energy transition capital investment is required, and BloombergNEF has quantified the investment opportunity at 200 trillion US dollars. As these examples highlight, there are structural elements that point toward an increased market opportunity, which in turn opens up the prospect of solid financial return on investment.

What investors told us in 2023 on financial motivations

• Financial considerations are notably lower on the list of priorities for both groups of investors. For instance, less than three in ten institutional investors¹ say alpha generation is a primary motivational driver for using impact investing. And just one in seven professional investors¹ believe clients predominantly seek impact strategies for competitive financial returns.
• These findings do not mean investors doubt the ability of impact to generate excess returns. Rather, they demonstrate the importance investors place on making a sustainable impact in line with their values, philosophies, and client needs.

3) Public markets

Despite impact investing’s long association with private offerings, it also represents a huge opportunity of scale leveraging public markets. Vontobel is not alone in this belief. As part of the Listed Equity Working Group at GIIN (the Global Impact Investing Network), we are contributing to guidance on what constitutes an “impact strategy” in listed equity. This formalization of best practice and reference points reflects that the past decade has seen impact investing via the stock markets attain the required critical mass, scalability, and global reach to help tackle the challenges facing the whole planet.

Our strategy is to address the world’s most pressing problems by investing in companies with innovative and scalable products and services. And public markets are an important part of the life cycle of companies that aspire to reach a certain scale. Zoning in on the UN SDGs as an example, it becomes clear that the efforts required to meet these goals are going to be enormous. Governments alone won’t be able to foot the bill. Capital will be required from both public and private actors and, as capital allocators, investment firms have a clear role to play.

What investors told us in 2023 on the shift to public markets

• Impact investing is undergoing an evolution towards public markets, which is helping to democratize the sector and make it more accessible to investors. This study’s findings indicate public-market strategies hold strong appeal for investors looking to make a sustainable impact and generate investment returns.
• A full 59 percent of global institutions say the opportunity to provide investors with a financial and non-financial return is driving their appetite for public-market impact strategies. The second-biggest factor, cited by half of respondents, is rising demand from end investors. This is followed by portfolio diversification (37 percent), and better engagement opportunities with investee companies (35 percent). The appetite for engagement reflects a preference for active managers who can push for change at investee companies through meetings with management and participation in shareholder votes.

If you’d like to dive deeper into the current thinking among institutional and professional investors on impact investing, the results of our 2023 Impact Investing Survey are a great place to get started.