Impact investing - Measuring how companies make the world a little better
Sustainability
Impact investing is investing in companies whose activities have a demonstrable positive impact on society. This form of sustainable investment is appealing to an increasing amount of investors, says Judith Sanders, investment strategist at ABN AMRO. ‘The combination of a measurable contribution to a sustainable world with financial returns makes people enthusiastic.’
How a company deals with the environment and society is an important part of the investment process for sustainable investors. The focus here is on the process of the company itself. ‘Impact investors take it a step further,' explains Judith Sanders, investment strategist at ABN AMRO. This form of investment involves sustainable criteria, but also the measurable social impact of the product or service of a company in which they invest. Sanders: 'The United Nations' development goals are an important guideline in this respect. These so-called sustainable development goals, the SDGs, help to map out the impact that these companies have on society.’ Intended goals include climate action, affordable and clean energy, good health and well-being, decent work and economic growth.
Innovative enterprises
The focus on impact makes clear to investors what positive impact companies have on society. Sanders: 'Think of innovative companies that develop an alternative to fossil fuels. Or a food producer that develops products with less sugar and salt and as such, contributes to a healthier diet.’ Sanders emphasizes the diversity of investments. ‘Impact investments can be made in a variety of companies, sectors and instruments.’ An investment in bonds to finance wind farms in South America is another example of an impact investment. Thanks to such business loans, hundreds of thousands of households have access to stable electricity. It also limits the emission of large quantities of CO2.
Strict selection process
Impact investment is becoming increasingly accessible and has gained ground in the investment world in recent years. Sanders: 'Investors see that financial and social gains can reinforce each other. The fact that the impact is increasingly measurable helps enormously'. Investors rightly want to know how a company's activities have a tangible positive impact on society. Sanders: 'The basis is therefore a thorough and rigorous selection process. These data show whether the attractive plans are actually being implemented in the company.’ The basis is testing companies against ESG criteria. This makes clear how a company takes the environment (environmental) and social criteria (social) into account, such as human rights and working conditions. Also important is how the company is managed (governance). Companies with major controversies and unsustainable products and services, such as weapons and tobacco, are not invested in. The impact is then mapped out.
Focus on impact
So, we know what impact a company has on society. ‘The ways in which companies can achieve a positive impact are very diverse,' emphasises Sanders. ‘Among other things, we use the seventeen United Nations Sustainable Development Goals (SDGs) to identify the impact that companies have on society. For example, how much CO2 emission - greenhouse gas - is avoided by the use of renewable energy. And how do the activities contribute to the agreements of the Paris Climate Change Agreement? Impact can also be achieved at the social level, for example by giving children access to better education or by helping the long-term unemployed find a job.’
Risks and opportunities clearly identified
Attention to impact stimulates innovation and helps companies to look critically at their activities. This focus can also contribute to the financial return of the investment, says Sanders. ‘We see that companies that score well on sustainable criteria and are aware of their social impact, have a good picture of the risks and opportunities. This enables them to respond well to trends and developments in the future. As a result, they are often ahead of competition. This is also attractive for investors.'