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Impact investing has great future potential as an asset class. However, the number of directly investable companies is currently still very limited. This is the conclusion reached by the FERI Cognitive Finance Institute in a recent study. Together with the Institute for Business Ethics at the University of Sankt Gallen, the strategic research centre of the FERI Group has analysed the concept, areas of tension and possible future prospects for impact investing. In addition, investors, product providers and non-profit organisations were systematically surveyed about this asset class.
"Impact investing will benefit greatly from the funding plans by the EU Commission in the coming years," says Dr. Kevin Schaefers, Co-Founder of FERI Cognitive Finance Institute. According to the Action Plan on Financing Sustainable Growth published in 2018, investments in sustainable projects, especially direct investments in the areas of climate, environment and social affairs, are to be particularly promoted at EU level.
Impact investing refers to investments that seek a direct environmental or social impact in addition to a financial return. In contrast to sustainable equity investments, impact investing provides companies directly with fresh equity or debt capital - for example via private equity or private debt. Targets are companies with a social or environmental impact intention. "Reconciling the financial goals and the ethical-sustainable purposes of such an investment is the biggest challenge in impact investing," says Schaefers. Investors would therefore also have to accept corresponding trade-offs.
The complexity of the asset class is one of the reasons for the continuing niche existence of impact investing in Germany: There is still neither a uniform definition of the term nor a satisfactory answer to the question of how large the social or ecological impact of the investment must be and how this impact can be measured. "This also increases the danger of 'social or green washing', where investments are labelled as impact investing but the direct ecological or social impact is increasingly watered down," Schaefers stresses.
The study authors recommend using the United Nations Sustainable Development Goals (SDGs) as a substantive criterion for impact investing. "These allow for a much broader investment base and could thus act as a catalyst for impact investing in Europe," says Schaefers. The EU Commission will also be guided by the SDGs in its legally binding definition of sustainable projects announced for the first quarter of 2019, he added.
According to the study authors, the demand for impact investing will also increase significantly for other reasons: "The problem awareness for the greatest social and ecological challenges is becoming stronger and stronger - not only in politics. Impact investing is virtually the logical conclusion," says Kevin Schaefers. The Millennial generation as well as large family offices are increasingly pursuing social and ecological interests as part of their asset investments.
Due to the complexity of the topic, investors interested in impact investing should seek comprehensive professional advice as part of their holistic asset allocation. With this practical study, the FERI Cognitive Finance Institute aims to provide private and institutional investors with initial guidance on impact investing.
The German study is available here.
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