A growing number of charities, institutions, and individual investors are talking about “impact investing” – where their capital goes directly to help address some of the world’s most pressing challenges. What does impact investing look like in practice?
"Sustainable investing is about avoiding harm and ensuring that we deliver benefits to all stakeholders. Impact investing is different and goes further,” says Lyn Tomlinson, Cazenove Capital’s Head of Philanthropy and Impact Investment.
The term might be widely used, she says, but it’s less widely understood. When used accurately, “impact investing” describes investments that contribute to solving some of most pressing social and environmental challenges the world faces. This contribution must be intentional and material, whilst providing the investor with a financial return.
“Once you define impact in that way, you have a relatively narrow universe of qualifying investments,” Lyn says. For example while there are tens of thousands of companies quoted on the world’s stock markets, we estimate that only 500-600 of these would meet this definition of contributing to solutions. This is why many impact holdings are “private” or unlisted, or are thematic and focused around very specific sectors such as resource efficiency, public health and financial inclusion.
The market is evolving fast. The appetite from investors is strong, but the difficulty lies in finding investment opportunities that deliver promised goals in a measurable way.
According to the Global Impact Investing Network, which acts as a knowledge base for this growing market, a significant majority of impact investors (66%) expect to receive competitive, market-rate returns from their holdings. Only a minority expect to cede some of their financial return as part of their objective.
“Unlike other investments, with impact holdings we need to consider the risk of the investments failing to deliver their promised outcome,”
Lyn says. “There’s a risk too that your measurement of that outcome is not effective. A standardised framework to assess these risks is still very much in development, most notably The Impact Management Project – this is a new field for asset managers.”
Specialists like Lyn Tomlinson are able to advise clients and create impact portfolios comprising suitable investments from public markets as well as certain private markets. Holdings could include venture impact funds such as Mustard Seed, which in turn back early-stage businesses such as Stuffstr.
John Atcheson’s mission is for consumers to get more use out of the things they buy. At the moment 70% of what we consume ends up in landfill, representing staggering financial waste as well as environmental destruction. “Why are we trashing billions of pounds?” he asks. “That’s what we’ve got to fix.” Stuffstr, which he founded in 2014 in Seattle, is his solution. Stuffstr bears a resemblance to the growing “recommerce” trend where, for example, valuable fashion or electronics items are resold. But Stuffstr takes this to an entirely new level.
Its plan is to work with brands – and two early examples are John Lewis and Adidas – to create situations where consumers are able to sell back everything they buy from a retailer, either for recycling or to find a new owner, in what is a truly “circular economy”.
In October 2019 Stuffstr powered a new service in the Adidas mobile app called Infinite Play, enabling UK customers to return any Adidas-branded products bought within the past few years in exchange for gift cards and loyalty points. The items are collected free and so far, says John, about 80% can be cleaned and re-used. The rest are recycled.
John sees the opportunities as revolutionary: “Consumers want better quality, and this drives them to buying things that last. And for the retailer there’s value in knowing how their products are wearing out.They can also stay in touch with their customers, and end the crazy linear situation where once a customer has bought something you say goodbye.”
Adidas benefits from the data and the closer relationship with its customers. “We want to re-think – and share responsibility for – the way in which we treat items once we’re finished with them,” Adidas said.
Lyn Tomlinson puts Stuffstr and Adidas in context for investors. “The example of Stuffstr highlights how a sustainable investment is different from an impact investment. Adidas is a sustainable leader – for example it has committed to reducing its environmental footprint as well as that of its entire supply chain. This is important because Adidas operates in the fashion sector which is a heavy user of resource and a polluter. Stuffstr by contrast has set out to solve the problem of waste in the economy.”
"In order to build diversified portfolios capable of providing clients with risk-adjusted market rate returns, the reality is that we need to invest in sustainable and impact investments across multiple asset classes whilst balancing the client’s values", she adds.
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