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How Does Impact Investing Work?

| August 30, 2018
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Impact investing aims to have a positive social or environmental impact and to generate positive returns for investors.

If you’re considering making an impact investment, you might wonder exactly how your capital will be used to target pressing social and environmental issues.

Impact investing is a way investors can seek to protect and grow their assets, whilst making a positive contribution to our world over the long-term.

But how does impact investing work in practice, and how might you go about selecting an investment or a specific fund to invest in? Here, we explain how some fund managers are using impact in their investment decisions.

Different approaches to impact investing

Importantly, there is no single method of impact investing. However, we have identified three main approaches.

    1. How companies operate

Here, investors look at environmental, social and governance (ESG) factors alongside traditional investment considerations to decide which investments to make. Including these factors can help an investor make a more informed judgement about where a company may be at risk or could have an advantage relative to its peers.

    1. Social and/or environmental trends

Certain sectors and industries will benefit from riding mega-trends like climate change or aging populations. For example, these may include companies in the sustainable agriculture sectors, or companies providing healthcare services for ageing populations in developed countries. Effective investors will still consider how individual companies operate, especially when deciding between companies within a sector; but the starting point is finding the sectors and industries benefiting from or driving wider societal trends.  

    1. Specific societal issues

Here, the investor is interested in a particular societal challenge and investing in organisations trying to address that issue. For example, these may include companies developing treatments for rare, or “orphan”, diseases, or companies providing solutions to reduce water usage for industries or consumers.

Bottom line: As companies improve their disclosure, investors are better positioned to distinguish between the firms that are managing material ESG factors well and those that are not. Improved disclosure provides a platform for more in-depth engagement, allowing shareholders to understand whether and how companies are contributing to critical ESG issues.

Contact us to learn more. 

Andrei Jigalin

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