A New Year is typically a time to make resolutions and beyond self-improvement many of us will be considering ways we can make a positive contribution to the world around us.

The investment industry is responding to this aspiration with vehicles which look to do good with your money as well as generating a healthy return.

At first glance ‘impact investing’ doesn’t seem that different from ethical investing which has been around for decades.

The main difference is that where ethical investing is about directing investment away from companies that do social or environmental harm, impact investing directs investment towards those that have a positive influence.

Impact investing also means generating a positive financial return, which although it sounds obvious hasn’t always been a priority with ethical investing.

A LARGE AND GROWING MARKET

By 2017 the amount of money devoted to impact investing stood at $228bn making it a distinct, specialised investment class in its own right.

According to the World Economic Forum the market grew five-fold from 2013 to 2017 and even if the world economy slows and stock markets struggle this year money will continue to flow into impact funds.

For now the market is led by development-finance institutions and specialist asset managers but a growing number of investors are looking for ways to generate benefits for society alongside healthy financial returns.

Once impact investing ‘tips’ into the institutional market, where assets under management are over $100tn, growth could really take off as the investment style gets adopted by the mainstream.

Already fund management firms have lent their support to The Big Exchange, an impact investing platform backed by The Big Issue magazine which aims to raise £3bn of assets over the next five years.

KEY DRIVERS ARE GLOBAL CHALLENGES

The main drivers behind impact investing are the big issues facing all of us: a growing global population, rising living standards, natural resource constraints and above all climate change.

As consumers we are becoming increasingly aware of the need to conserve natural resources and above all not to pollute the environment.

The public support for the campaign to ban single-use plastic following the BBC’s Blue Planet II series and the success of the ban on ‘disposable’ plastic carrier bags are examples of ‘people power’.

Some of the key investment areas for impact funds are low-carbon power generation such as wind and solar plants, water supply and treatment and improved healthcare in developing countries.

In these areas solutions are already available but they need funding to enable them to scale up over the coming decades.

However there are still major issues to solve such as how to tackle air pollution, how to improve nutrition in poorer regions without impacting the environment and of course how we can avert a serious change in the global climate.

SETTING OUT PRINCIPLES AND ACHIEVABLE TARGETS

One of the drawbacks of impact investing is that despite the increase in interest there are still no clear, established guidelines which means it can be hard to distinguish between impact and other forms of responsible investing.

Most impact investors have adopted the United Nations’ Sustainable Development Goals to define the relationship between their investments and their goals.

Also the International Finance Corporation, part of the World Bank and one of the earliest backers of sustainable investing, recently set out eight principles which it hopes will help managers set measurable social and environmental goals.

This spring it aims to finalise these principles and sign up some of the world’s most influential investors, academics and politicians.

TWO DECADES OF EXPERIENCE

One of the pioneers in the field is Impax Asset management (IPX:AIM) which has been investing for social and environmental change for 20 years.

Over that time sustainable investing has grown from a niche industry with a focus on micro- and small-cap environmental technology stocks to a business worth hundreds of billions of pounds invested in companies of all types and sizes across global markets.

Impax’s investment teams run a range of strategies covering resource efficiency, environmental markets, food and agriculture, and water infrastructure.

In the year to the end of September assets under management were £12.5bn, an increase of 72% thanks both to new inflows and to the acquisition of Pax World Management.

Impax’s funds themselves had a good year, with the Impax Global Opportunities Fund (BSXNJK4) generating almost double the return of the MSCI World Index.

A new arrival on the scene is the Global Sustainability Trust which aims to invest in private markets along the lines of the UN’s SDG goals.

Open to applications until 28 January and due to commence trading on 31 January, the trust will be managed by Aberdeen Standard Investments, part of Standard Life Aberdeen (SLA).

It is targeting £200m of capital in its first round of fund raising with a net return to investors of 6-8% per year after fees.

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