Published on December 13, 2023

Impact Investing and its Effects on Climate Change at Large

As we move into 2024, how does the volatile landscape of today’s social and environmental state alter an investor’s strategy who may want to diversify their portfolio? Impact investing – an investment strategy that seeks to bring about specific beneficial or environmental effects with the chance to reap financial gains – is one area that could make it on the agenda. On a global scale, a lot happened. Wildfires, hurricanes, record storms – it’s all added to the stir of commotion. However, when we zoom in discuss where the U.S. economy currently stands, we’d be remiss to leave climate change out of the discussion. Read on to discover how today’s leading private managers are tapping into a market that occupies real funds to cultivate change – with generous financial returns.

The Latest: Climate Change Across the Board

Temperatures all over the globe have reached new heights (and lows). As a result, 2023 is now the hottest year on record. Ahead of this year’s Cop28 Climate Summit, which kicked off on November 30th in Dubai, the UN’s top climate official warned that the time is now for world leaders to begin taking real action to combat these statistics – and soon. Human health is on the line like never before.

The conference is held annually, over the span of two weeks, where everything from harmful fossil fuels to record-breaking hurricanes are discussed. Last year, nations agreed to contribute to a fund that could help vulnerable countries cope with climate disasters influenced by dangerous greenhouse emissions that are being pumped into the earth’s atmosphere. Since then, not much progress has been made. With the United Arab Emirates hosting this year’s climate talks, many hope that more solutions will be reached – especially amidst the geopolitical upheaval in the Middle East. The Biden Administration is already stepping up to the plate, with VP Kamala Harris having announced new funding efforts – a whopping $3 Billion given to the Green Climate Fund – for climate action that will begin rolling out soon.

So, the question now becomes: what kind of action can investors who are looking to create some change with their dollars take? There are two specific ways.

ESG Investing vs. Impact Investing: What’s the difference?

Impact Investing: ESG

You may often hear Environment, Social, and Governance (ESG) Investing circulating around the conversational perimeters in corporate America. ESG investors often organize efforts to combat climate change through the actions of a particular company that’s shown a willingness to improve their performance in those specific areas. They do this through buying shares in the company. ESG Investing functions mainly on the assumption that the extra financial backing will influence positive change throughout society.

On the other hand, impact investing goes a step further as it allocates capital to specific businesses that are driving environmental or social change through their daily actions or their sole company mission(s). Impact investing puts dollars toward those already creating an impact in their own right. Investors who go this route can often have more of a definite say in where their money is going, what it’s doing, and how it’s impacting both of those factors.

This distinction is very important for an investor to know if they want to watch exactly how their dollars are being used – and where.

Why and How Private Managers are Shifting Their Perspectives on Impact Investing

In recent years, impact investing has become more popular among investors serious about diversifying their portfolios to withstand unpredictable times. Climate change concerns are among the top reasons financial groups exclude certain companies from their portfolios. Studies show that 40% of exclusions are motivated by concerns over climate change. This shift in perspective is now fueling most investors to step away from plans to invest in companies that contribute heavily to fossil fuel emissions.

But this shifts the lens in another direction: more investors are now considering how they can do something about what’s happening. In a recent survey that involved over 420 assets owners and managers, it was found that impact investing has become “increasingly important.” 54% of survey participants expect to use it in the next two years.

What do investors get out of this kind of alternative investing?

Impact Investing: Alternative Investing

The objective for investors who take part in any amount of impact investing is the opportunity to generate positive social and environmental change that reaches far and wide. Plus, there’s also stark potential to reap stable, long-term financial returns through other socially backed avenues such as collaborative investing. These benefits align well with investors who want to contribute more positively with their financial goals.

Gone are the days when a sound, single-choice investment in a company that piqued an investor’s interest would suffice. A lot is happening worldwide, and private managers and investors are not only noticing – they’re taking action. Most are seeking more active ownership in their shareholding practices to influence corporate behavior in ways that will drive real, actionable change.

In sum: they’re putting their money where their mouth is. We should expect to see much more of this in 2024 and beyond.

Discover how today’s leading private managers are tapping into a market that occupies real action to cultivate change with the potential for financial returns.

For financial advisors only.