With concerns about environmental sustainability, social equality and political progress top-of-mind, Millennials, Gen-Z and women prefer sustainable, socially-responsible investments, known as impact investments. The result: companies need to commit to Environmental, Social and Governance (ESG) standards to attract a growing contingent of investors.
Impact investing is described by the Global Impact Investing Network (GIIN) as investments made into companies, organizations, and funds with the intention to generate a measurable social and environmental impact alongside a financial return. The GIIN further defines impact investing by the following four core characteristics:
INTENTIONALITY – "An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing. "
INVESTMENT WITH RETURN EXPECTATIONS – "Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital. "
RANGE OF RETURN EXPECTATIONS AND ASSET CLASSES – "Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity."
IMPACT MEASUREMENT – "A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of
underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field. "
The change in social paradigms is clearly recognizable from recent survey results:
These results present a clear mandate for companies to adjust their strategies to the sustainable orientation of millennials, who will gain control over an estimated $30 trillion that will pass from Baby Boomers to their children in the coming years. The same message is derived from Deloitte’s 2018 Millennial Survey Report stating that "There continues to be a stark mismatch between what millennials believe responsible businesses should achieve and what they perceive businesses’ actual priorities to be." However, the report also points out that "One silver lining is that far more millennials believe business leaders are making a positive impact on the world than government or religious leaders."
Another important population for impact investment is wealthy women, who are equipped with capital, expertise and increasing leadership roles. Recent surveys highlighted the driving force of women in impact investing:
According to Kiersten Barnet, deputy chief of staff and manager of the Bloomberg Gender Equality Index, one of the biggest drivers of the growing interest in impact investing and ESG data is the fact that women are gaining access to significant capital, which they want to invest into financial opportunities in line with their values.
What makes impact investing so attractive, is not just the social and environmental aspect. Impact investment can also stimulate the creation and growth of innovative enterprises that will be urgently needed, considering the growing world population and its increasing demand for food, water and energy. At the same time, evolving macro-economic trends are creating a market for responsible investors that can compete with, and sometimes even outperform, traditional investment strategies.
The key message is that millennial and women preferences for impact investing is an opportunity that companies must be prepared for. All the evidence points to a new era of values-based investments based on these demographics. Companies that invest inprogrammes to manage their ESG impacts are more likely to attract funds from investors, expecting ethical benefits. Meanwhile, asset managers want investment targets that manage ESG risks effectively. Along with an ESG commitment, comprehensive due diligence and ongoing risk monitoring can help companies mitigate the risk of environmental damage, gross corruption, systemic violation of human rights and other serious violations of fundamental ethical norms—and attract these increasingly influential investors.
1. Download our eBook on Ethical Expectations to explore the topic further.
2. Learn how risk monitoring within a PESTLE framework help companies spot potential environmental or social risks that could endanger investment.