How important is it that we invest for impact in 2019?
Last October, the UN warned that we only have 12 years left to avert a climate change catastrophe.
Its Intergovernmental Panel on Climate Change said these dozen years are the last window of opportunity to keep climate change at a maximum of 1.5C.
Anything above this amount could accelerate floods, droughts, extreme heat and poverty in areas populated by millions of people.
As pressure ramps up on governments and corporations to clean up their act, scientists and global leaders are busily working on solutions.
So too are entrepreneurs, in fields such as renewable energy, sustainable food produce, recycling technologies, carbon capture, and storage and electric vehicles.
But in many cases, their innovations will be unable to reach their potential and deliver a positive impact without investors.
Those willing to inject funds into their ventures are critically needed if the world’s current trajectory is to change.
Impact investment is not philanthropy; it is a means of supporting environmentally or socially minded enterprises while also making a profit.
Although a relatively new concept in financial circles, it is growing rapidly. In 2017/18, the value of impact investing doubled to US$228bn, says the Global Impact Investment Network; and this figure only includes investment houses willing to open up their books to researchers. Individual investors were not factored in, so the real numbers could be - and are likely to be - significantly higher.
More impact investors are certainly needed. The UN reckons up to US$7trillion of investment is required for the world’s sustainable development goals to be met by 2030. Governments alone will not be able to cover this.
Anyone considering becoming an impact investor in 2019 may be surprised by the abundance of opportunities to do so.
Shifting consumer trends are creating more demand for products, services and investment vehicles driven by a desire to have a positive impact. Big financial institutions, online platforms and entrepreneurs are responding, giving you an array of entry points to impact investing.
Partly, this is a generational issue. According to the Center for Financial Inclusion, US$40 trillion in wealth will be transferred over the next 30 years to women and millennials in the US. On this, the institution says:
“Both of these groups have expressed strong interest in investing aligned with their values, with millennials demonstrating they are deliberate about the social impact of their retirement funds”
Also, research suggests that consumers are generally shifting towards businesses which proclaim to be mindful of their environmental and social responsibilities.
For example, a UBS study this year found that 71% of consumers avoid buying from businesses with “perceived negative environmental, social and governance (ESG) practices”.
Many impact investors choose to back entrepreneurs tackling issues they are mutually passionate about.
Aside from climate change, there are a multitude of other environmental issues being challenged by investment-hungry startups.
Among them is the plastic waste crisis, which has been catapulted up the global agenda by evermore damning research findings. One study, for example, tested tap water in seven countries and found that 83% of samples contained plastic microfibers. Another suggests that 95% of adults in the US had the carcinogenic substance bisphenol A – found in plastic – in their urine.
Startups working on solutions include those involved in developing new recycling technologies and the emerging field of plastic mining – the reclaiming of unrecycled plastic from landfill and elsewhere.
Others are involved in finding alternatives to the throwaway plastics which increasingly blight our environment.
Ecoffee Cup, which makes reusable cups from natural fibres, is one example – but many others that may be seeking impact investment exist.
Meanwhile, you may be more motivated as an impact investor to support projects on a local or regional level rather than globally.
Most areas of the UK have been affected in some way by the various manifestations of the housing crisis, for instance. Finding ways to build affordable, and appealing, homes in sustainable ways is part of the solution entrepreneurs are working on.
But there are enterprises trying to solve almost every social issue imaginable, from equal opportunities in the workplace to elderly care, child poverty, disability access and addiction.
It is important to reiterate, however, that impact investing is distinct from charitable fundraising and some models of social enterprise in which shares cannot be acquired. Impact investing, while supporting environmental and/or social causes, is aimed at making capital gains on your investment.
While the world clearly needs more impact investors, it also worth considering why you might need impact-focused startups in your portfolio in 2019.
Of course, there is the satisfaction of helping to solve global and community problems. But also, from an investment point of view, it makes sense.
Firstly, there is the added diversity that impact investments bring to your portfolio. Your existing investments may solely include the traditionally popular asset classes, such as stock market shares.
Market crashes may be real threats to your personal wealth if so. Adding startups, including those with positive impact woven into their plans, enables you to mitigate this risk.
If you select your investments wisely, you could also be in line for healthy returns. With consumer demand for environmental and social impact products and services likely to continue surging in coming years, many impact entrepreneurs are entering high growth markets.
This may be reflected in the speed of their route to scale up and the size of the gains available upon exit as an investor.
There are a number of vehicles through which you can become an impact investor.
Increasingly, investment houses and other financial institutions are developing impact funds for investors. These enable you to support a range of impactful companies without needing to identify and closely monitor each opportunity, with fund managers overseeing the fund’s growth.
Another route is crowdfunding via one of the growing stable of platforms that specifically cater for impact investors. These are ideal for investors keen to test the water with a small outlay before making bigger ones – and also for those looking to quickly build up a diverse portfolio of impact startups.
Finally, you may seek a more involved role as an impact investor, by directly investing in startup opportunities that interest you. This can be a very tax efficient route, with several incentives designed to reward investors who back enterprise growth.
Whichever door you choose into the world of impact investment, there is no doubt that your presence is needed in 2019.