Emergence of Impact Investing

Reading Time: 2 dk. Category: Blog Date: 10 May 2020

Let us go back to the 2008 financial crisis that has shaken the US and the world:
It all started when the real estate markets started to rise and the banks started to give affordable mortgage loans with high credit scores. Banks thought that, in the worst case, the underlying real assets would be acquired even if the loans were not to be paid, and they were going to make a profit anyway by the sale of real estate. These loan agreements were combined and packed together to become tradeable bonds within the market. Such an economy of converting individuals’ mortgage loans into bonds went out of control totally once the high profit-seeking lenders and brokers started to give missing and misleading information regarding credit scores and risk indicators.
Impact investing emerged right after the 2008 crisis and started to show an upward trend. How did the “impact investing” model emerge from such a crisis named as the “crisis of the century” by Alan Greenspan, the Chair of Federal Reserve of the US?

One of the lessons learned from the 2008 crisis is the fact that financial institutions have a responsibility against individuals and community beyond maximising their profit. The necessity of considering not only the financial status but also other factors of the company are crucial when it comes to allocating funds to an investment; to evaluate if the company is managed well, if the employees have health and safety measures applied, if there are independent board members, if the company is environment-friendly, etc. As such criteria have exposed the threats and opportunities for the companies, they also have an impact on the company value and share prices.
Once the United Nations has announced the 17 Sustainable Development Goals in 2015 to be met by 2030, the concept of “sustainable investments” has become more important. Impact investing, as a form of sustainable investment, is focused on unsolved social challenges to be financed by the private sector, and to meet social needs by project-based finance.
Most importantly, impact investing aims to find a solution to unsolved social or environmental challenges in a long term by measuring and creating positive impact. In today’s world, impact investing is happening in every region and sector, as long as the intention of making “impact” is embedded within the company strategy.