Impact investing has become a powerful, responsible business reality

Impact invest­ing, com­bin­ing finance with sus­tain­abil­i­ty, has been around since the 1940s, but in the last few years demand has strength­ened as the envi­ron­ment reach­es a crunch point. Pol­i­cy-mak­ers are now pil­ing pres­sure on the pri­vate sec­tor and the desire for pos­i­tive invest­ments is reach­ing a peak.

Some $22 bil­lion was invest­ed last year in impact projects, accord­ing to the Glob­al Impact Invest­ing Net­work. Nine­ty one per cent of last year’s projects equalled or bet­tered expect­ed finan­cial returns, and Euro­pean devel­op­ment banks alone cal­cu­late that in a year they cre­at­ed four mil­lion jobs and $11 bil­lion in local tax rev­enue.

Impact invest­ing is paving the way by allow­ing investors to change their behav­iour. They are col­lab­o­rat­ing with fast-grow­ing part­ners for a two-way gain and play­ing an essen­tial part in sup­port­ing local sus­tain­able devel­op­ment goals.

So far, investors have made a near-even split of equi­ty and loan invest­ments, and the big focus has been in finance and infra­struc­ture, as well as man­u­fac­tur­ing, and agri­cul­tur­al and ser­vice busi­ness­es, accord­ing to the Asso­ci­a­tion of Euro­pean Devel­op­ment Finance Insti­tu­tions.

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Impact investing’s mod­el is dif­fer­ent from oth­er sources of finance. “Impact invest­ment banks will push cap­i­tal into places where tra­di­tion­al investors have found it dif­fi­cult, paving the way for future growth. We can open up mar­kets for investors and for our com­mer­cial bank­ing part­ners, while help­ing local busi­ness­es and their com­mu­ni­ties to pros­per,” says Jür­gen Rig­terink, chief exec­u­tive at Dutch devel­op­ment bank FMO. “As well as our expec­ta­tion of healthy returns, we have an equal­ly clear demand for sus­tain­abil­i­ty and social devel­op­ment.”

Mon­ey invest­ed in this way is typ­i­cal­ly prof­itable. “Investors want to see their mon­ey grow and our expe­ri­ence shows finan­cial returns go hand in hand with impact,” Mr Rig­terink says, adding that devel­op­ment banks analyse, reduce and some­what shoul­der the risk. “They also can be assured they are aid­ing envi­ron­men­tal and social devel­op­ment.”

FMO is among the banks most expe­ri­enced in this area, oper­at­ing for almost 50 years, pro­vid­ing cap­i­tal, knowl­edge and net­works to respon­si­ble busi­ness­es. The Dutch firm han­dles approx­i­mate­ly $10 bil­lion of assets in more than 80 coun­tries, and works strict­ly with­in the well-estab­lished equa­tor prin­ci­ples and World Bank Inter­na­tion­al Finance Cor­po­ra­tion per­for­mance stan­dards, which stip­u­late high envi­ron­men­tal and social require­ments.

On the ground, its impact improve­ments include every­thing from cut­ting emis­sions, bet­ter use of resources and improv­ing ener­gy access to reduc­tions in inequal­i­ty and unem­ploy­ment. Results of the invest­ments in local pros­per­i­ty are analysed and report­ed in terms of job gen­er­a­tion and ener­gy effi­cien­cy, often with the assis­tance of big data, to ensure impact is mea­sur­able and vis­i­ble.

We have to stop unsus­tain­ably over­load­ing the plan­et; the Earth has reached a tip­ping point

In an age where local and glob­al envi­ron­ments face unprece­dent­ed chal­lenges, there can be no deny­ing the urgency of pri­vate sec­tor impact invest­ments. “We have to stop unsus­tain­ably over­load­ing the plan­et; the Earth has reached a tip­ping point. Busi­ness­es, gov­ern­ments and indi­vid­ual investors now think about how to be a force for good and not only mit­i­gate the bad,” says Mr Rig­terink. “This approach, com­bined with well-judged invest­ments, ensures a huge­ly pos­i­tive, much-need­ed impact.”

He main­tains that the tra­di­tion­al bank­ing mod­el “is dis­ap­pear­ing fast” for investors, as more banks take the oppor­tu­ni­ty to join the move­ment. “Even though devel­op­ment banks have been in the lead, estab­lished com­mer­cial banks are now mov­ing fast on the impact invest­ment con­tin­u­um,” Mr Rig­terink notes. “And for the firms invest­ed in, by increas­ing their val­ue, we can save costs, raise pro­duc­tiv­i­ty, improve risk man­age­ment, enhance access to mar­kets and cut the envi­ron­men­tal foot­print.”

As busi­ness­es, investors, their part­ners and gov­ern­ments increas­ing­ly recog­nise the grow­ing urgency for change, impact invest­ment has built an unstop­pable momen­tum. The oppor­tu­ni­ty to gen­er­ate reli­able prof­its in the long term, while help­ing local peo­ple, their economies and envi­ron­ments, is unmiss­able.

To find out more about impact invest­ing and how FMO can help please vis­it www.fmo.nl