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What is impact investing?

2/6/2020

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The world cannot keep on growing as it has been. While global imbalances like uneven growth, wealth inequality, and environmental degradation have generally raised living standards, unsustainable growth now puts future living standards at risk, and endangers the lives of generations to come. 

According to the United Nations, achieving the SDGs will take between $5 to $7 trillion, with developing countries facing an investment gap of about $2.5 trillion. Bridging this gap is impossible for developing countries to tackle alone, and so the need for capital is huge.

So how can we make the world a better place by 2030?
Traditionally government and institutional investors help to fund this gap. However, with recent economic growth there is also huge potential from private capital. In the next 20 years, 460 billionaires will hand down USD 2.1trn to their heirs - that’s the size of India’s entire GDP. This begs us to question why private investors haven’t become more involved? Largely this is due to a lack of transparency, data availability and incentivisation. 

What is impact investing? 
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals. It is without doubt that this approach is considerably better than unreliable aid packages that have become the norm in the developed-developing world relationship.

Small enterprises are often too big for micro-finance and informal sources of finance, but too small or risky for commercial banks and private equity investors. However, impact investors can address this challenge as they have a critical role to play in the expansion stage before the enterprise can take on commercial finance. Impact investing certainly challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.

The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, micro-finance, and affordable and accessible basic services including housing, healthcare, and education. Interestingly, in 2014 Africa received 15% of impact investment Assets Under Management (AUM), with sub-Saharan Africa constituting the second highest regional allocation globally. This prominent position in impact investment is anticipated to strengthen, with Sub-Saharan Africa identified as the geographic area that most investors intend to increase their allocations in.

The Sustainable Development Goals (SDGs) and increasing global emissions present a critical opportunity to promote sustainable growth for all. Now more than ever, private capital can and must be invested to achieve them, as sustainable investments represent an effective tool which can contribute to closing this investment gap and facilitate the transition to a more sustainable and just society.

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