What is Impact Investing? Three Reasons Why Banks and Credit Unions Should Pay Attention.
Many banks and credit unions are driving change to enable personalized, data-driven, multi-channel support to meet the needs and demands of their customer base. In addition to driving a superior customer experience, it is important also for financial institutions to be in touch with and adapt to, key trends in money management and investing. One such trend that is continuing to grow is impact investing.
What is impact investing?
Impact investing has been growing in popularity in the last decade. It has changed how many people evaluate their investments. An offshoot of Socially Responsible Investing (SRI), impact investing makes a positive change or impact while making a financial gain. These benefits can be in non-profit community programs or clean technology enterprises.
Here are three reasons why banks and credit unions should pay attention:
Millennials are socially conscious
As we’ve shared, Millennials are an optimistic generation but in many cases, also realistic on the current state of social and environmental issues. Many have taken an altruistic role in society and demonstrated a passion for social causes that benefit the greater good. Millennials tend to be generous with their time, money and influence to bring awareness for causes they believe in. In addition, they seek out opportunities to work for and buy from companies that share their socially conscious values. It then follows that they are seeking the same opportunities for their investments.
In their Global Corporate Sustainability report, Nielsen noted Millennials were more willing to pay extra for products and services from sustainable brands, with 73% of Millennials agreeing vs. 66% of total respondents. Further to this, Cone Communications found that 91% of global consumers expect companies not only to make a profit but also to operate responsibly by addressing social and environmental issues. Almost more telling, 90% of consumers indicated they would boycott a company if they learned of irresponsible or deceptive business practices.
With Millennials standing to inherit $30 trillion over the next decades from their predecessors through what has been defined as “great transfer of wealth” financial institutions are working to attract their business. Highlighting your bank or credit unions corporate social responsibility (CSR) missions will meet their expectations. Developing products and services that easily enable Millennial investors identify other impactful investing options will differentiate your financial institution.
Education is accelerating its growth
With its growth in popularity, Millennials, educators, and entrepreneurs are introducing new impact investment options to the marketplace. Many of these options are being initiated at the University level, further demonstrating the demand by Millennials for impact investing. Many educators are actively integrating it into their curriculum.
In an example launched In the fall of 2018 Desautels Faculty of Management introduced new fund dedicated to socially responsible investing within their $5 million Desautels Capital Management (DCM) – a student-run, registered investment management firm. This fund is managed by students enrolled in the Honours in Investment Management and Masters of Management in Finance (MMF) programs. While students at Columbia have launched an Impact Investment fund called Microlumbia which ‘supports financial inclusion in underserved communities around the world while educating and inspiring the next generation of impact investors.’ In a third example at the University of North Carolina at Chapel Hill, two students founded an Impact Investing Club in which every member is given $100,000 of simulated money to manage. They are then taught how to identify what companies are seeking a social return through comparative analysis with the goal of providing exposure to the idea of impact investing.
And the examples extend past an academic application. Foundations such as Kellogg’s MDI and large banks like Goldman Sachs and JP Morgan have all created funds to direct a portion of their portfolios into impact investments given the demand from both their boards and clients.
A growing market and proving to provide returns
A report by the US SIF, The Forum for Sustainable and Responsible Investment, found that sustainable, responsible, and impact investing increased by 38% to $12 trillion from 2016 to 2018. This growth is reinforced by the Global Impact Investing Networks (GIIN) survey of just 209 organizations which showed growth from $50 billion of impact investing assets from 2010 to $114 billion in 2017.
As investments, it is important to discuss the financial returns. In the same Global Impact Investing Networks study, over 90% of impact investors reported that their investments were meeting or surpassing their projections. Analysis from McKinsey demonstrated that it is possible to make profitable exits in social enterprises. In their review of 48 investor exits between 2010 and 2015 and found that they produced a median internal rate of return (IRR) of about 10% with the top one-third of deals yielded a median IRR of 34%. McKinsey’s analysis also showed that social enterprises with strong business models do not need long holding periods to generate value for shareholders, making them viable investment alternatives to traditional investments.
Nick Ashburn, senior director of impact investing at the Wharton Social Impact Initiative, shared that “This generation of students wants to change the world through business. They want to invest in line with their values, and they want jobs that facilitate that.” The growth demonstrated in these assets shows that this shift is well underway. As Millennials get older and wealthier, an even greater push for impact investing is expected. Driven by investors, but also from younger employees at key financial institutions who see opportunity in investing in areas such as education, gender equality, fighting hunger and climate action. How has your financial institution embraced the trend towards impact investing? We’d love to hear about it. Let us know at firstname.lastname@example.org.