The world is changing. We are experiencing extreme weather conditions with increasing frequency which has both environmental and social impact. The challenges to our society and environment – presenting both risks and opportunities – result in a higher demand for advice to understand the impact on investments.
What is impact investing?
The Global Impact Investing Network (GIIN) describes impact investments as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
In the World Economic Forum’s latest global risk report for 2019 presented in Davos climate and climate-related risks were ranked highest by the surveyed stakeholders. Therefore, investors need to create social and environmental benefits in order to generate a positive contribution to their returns.
The pressure on investors to adopt a sustainable perspective has increased by various actions taken by governments or regulators. With the United Nations Sustainable Development Goals and the COP 21 – Paris Agreement the first steps were taken to promote the measuring and understanding of non-traditional risks.
Several studies explore the theme of impact investing. However, the majority of investors still is not convinced that it is time to take action – now. Maybe because the why is not made clear enough. It is not only about generating positive impact alongside financial return. It is more about being ready for the future. The European Commission’s action plan for sustainable finance is showing commitment for climate and this development will continue. This is not a trend that will be over in a few months. Based on these facts the question is no longer Why? But rather How to be ready for the future? And in addition: How to generate financial return and keep my market share? If you can keep return levels steady or grow them further, the social impact will come with it: Profitable and healthy companies are less likely to lay off staff. They are also more inclined to offer or keep up certain benefits for their employees.
Call for Action
Given the latest climate developments, there is still enough room for further engagement when it comes to impact investing. It is necessary to set up a framework with enough flexibility. This should offer incentives for positive contributions to environmental or social factors. Companies now have the opportunity to identify new sustainable business models or develop existing models further in order to increase their market share going forward. Asset owners need to understand their non-financial risk and shift their money away from it. These measures should be supported by governments and regulatory frameworks. The incentives could be tax advantages/disadvantages, investment benefits or regulatory framework adaption. A close co-operation between private and public sectors is a must-have for further development. The world’s climate is changing and all stakeholders now have the opportunity to be part of the change and grow further.