Richard Georg Engström: Entreprenuer and advisor in impact investing. Expert and blogger at Bootstrapping regarding business development, investing, economy and development within green tech and other sustainable solutions.

It makes financial sense not to go back to business as usual, but to invest in impact

Survey shows that about 15% of both impact and economic returns exceeded global impact investors' goals. Only 9% of them reported poor financial results in impact investing.

We know it. Even though most of us over the last few months have probably put exactly that thought into mental rest. Following the current pandemic, and a subsequent economic downturn – by some addressed as an economic crisis – lies the real big and long-term challenge: the climate crisis. A challenge that compared to COVID-19 is of a completely different world.

Reverting to normal is not an option

We know it. Even though it is difficult to take in. To return to normal after the COVID-19 pandemic and business as usual is not the way forward. These months we have actually seen a small tab of a concrete picture of what happens if we go a different route. Satellite images show that in just two months, when air and car traffic, as well as industrial production and burning of fossil fuels, have gone to sleep, our environment has improved in several areas of the world. Considerably. However, the scientists’ graphs show that if we do not seriously change our way of life and continue to keep e.g. traffic, production and burning of fossil fuels down at this level, or even lower, the microscopic improvement we have seen in this peculiar time has been nothing but a ripple at sea. All scientific research shows that business as usual means warming our seas by 5 degrees or more. The consequences of this, within our own lifetime, are unmatched.

We know it. Reverting to normal is not an option. That is why there are more and more people, from environmentalists to capitalists, from religious leaders to politicians who believe that we need to leverage our economy, post-COVID-19, for huge investments in green technology and conversion to a sustainable society. This is the only way out of this small crisis, and it will especially counteract several pandemics and in the long run a potentially severe climate crisis.

But what are we to invest in? What technologies and solutions will have the greatest impact? And those who have the capital to invest in this development, how do they look at transforming the business into investing in social and environmental improvements, combined with a financial return? Important questions to which we unfortunately do not have many answers.

A long-term and comprehensive effort to understand international investors’ interest in a sustainable transition, most commonly referred to as “impact investing”, has been done since 2009 by GIIN (The Global Impact Investing Network). GIIN is a non-profit organization dedicated to increasing the scale and effectiveness of impact investing and accelerating the development of a cohesive impact investing industry. Last year came the 19th edition of their annual Impact Investing Survey. 266 of their members, who collectively deploy USD 240 Billion for impact investments has answered a number of questions about how they invest their capital in improvements for people as well as society and our common planet. Compare this with the fact that all the money in the world that goes to development aid is at “only” USD 160 Billion. A clear sign that there is plenty of capital to improve the world, if only for commercial investors.

The most common motivation for impact investors in The GIIN Impact Investing Survey 2019 shows that they feel obligated to be responsible investors (85%)

The GIIN Impact Investing Survey 2019 shows overall that one third of this kind of capital is on US hands, and 10% is managed by European financial institutions. The areas for which investors primarily allocate their capital are renewable energy (15%), microfinance (13%), other financial services (11%), food and agriculture (10%) and water, sanitation and hygiene (7%). Followed by housing, health, forestry, infrastructure and education.

But why really? Why have these investors already chosen the “right path” to a more sustainable world?

The most common motivation for impact investors in The GIIN Impact Investing Survey 2019 shows that they feel obligated to be responsible investors (85%). They are significantly more likely to indicate their mission as an important motivation than investors investing in both impact and conventional investment (93% versus 61%). Over half of all respondents stated that their contribution to a global agenda, such as the UN 17 Sustainable Development Goals or The Paris Agreement, is also a very important motivation for impact investing.

Does it also make financial sense to invest in impact, besides making the world better? What is the impact of commercial investors’ expectations on their commitment?

Among the respondents in GIIN’s 2019 survey, the goal is to create a positive financial return along a broad spectrum ranging from capital preservation to competitive, risk-adjusted market rate returns. Two-thirds is mainly targeting a market return with some risk adjustment. The remaining third is split between those who target a return below but close to market rate (19%) or a return below market rate closer to capital preservation (15%). Surprisingly, about 15% of respondents indicated that both impact and economic benefits actually exceeded their targets. Only 9% of respondents reported poor financial results in impact investing.

Even though GIIN has been collecting data for 11 years, compiling unique analyzes and delivering many reports that have set standards in global development regarding impact investing, there were, after all, only 266 participants in last year’s report. 77 participants were from Europe. All in all, this means that we hardly know anything of what considerations the wide range of investors (from business angels and family offices across VC to capital and pension funds) have about placing their capital and commitment in sustainable change.

From today, we need to direct even more of our focus, capital and other resources towards impact investing

I think that is a big flaw. If we are to motivate as many investors as possible to increase investments in future-proof technologies and sustainable solutions, we need to gain a much greater insight into what is going on and broaden the understanding and best practice in impact investing.

In 2019, in one of my projects, The One Initiative, we therefore conducted the first Nordic market analysis on impact investing. Our analysis shows, among other things, that 41% of participating Nordic private investors are driven by creating a positive impact on society before prioritizing the financial return. Why? Quite simply, because 83% of the participants expect their impact investments to deliver a financial return at or above market rates. In the long term, more than seven years, 40% even expect their impact investments to be a better financial investment than their conventional investments. 76% of them invest in renewable energy, 47% in health and 46% in education. The rest of our analysis can be read by downloading “Impact Report Nordic Investors 2019.”

However, there is much we did not ask the Nordic investors in 2019, which will be crucial in understanding which technologies and solutions make the most sense to invest in; how to do due diligence of impact targets in combination with a good business case, and what kind of investments is best suited for this new type of companies, etc.

This is why again this year we are conducting a Nordic market survey and analysis of impact investing in the Nordic countries. This fall, we will present “Impact Report Nordic Investors 2020” and distribute the report free of charge to anyone who wants more knowledge and insight into the area. We now encourage all Nordic investors to participate in this work so that we can jointly unveil how Nordic investors relate to impact investing.

We know it. We are not going back to normal. From today, we need to direct even more of our focus, capital and other resources towards impact investing.

I hope, therefore, that you will complete this year’s online questionnaire and thus help as many Nordic investors as possible to adjust their investment practices to the future we all face.