Key points in a nutshell:
- Impact investing funds aim to achieve investments that generate both financial returns and positive social and/or environmental impacts.
- These funds can focus on private or public markets, leading to different impacts and levels of investor participation.
- The EU Transparency Regulation plays a significant role in shaping the landscape of impact investments by establishing specific disclosure requirements for financial market participants.
- Impact investing funds differ from other sustainable funds by taking a proactive approach and targeting investments that actively contribute to positive social and/or environmental change.
- If you want to invest in companies making a positive contribution to a sustainable future, radicant's SDG-oriented financial products can help you contribute to the UN's 17 Sustainable Development Goals (SDGs).
1. What are impact investing funds?
Impact investing funds are investment instruments designed to achieve both financial returns and measurable positive social and/or environmental impacts, often referred to as "impact."
Unlike traditional investment funds that solely focus on financial returns, impact funds target investments that address urgent global challenges such as climate change, poverty, healthcare, education, and sustainable development.
By combining financial goals with specific sustainability objectives aimed at creating impact, these funds provide investors the opportunity to make a difference while earning returns.
2. How do impact investing funds work?
Impact investing funds identify investment opportunities aligned with their objectives. Fund managers assess potential investments based on their social and/or environmental impacts, using standardised ratings from data providers or their own impact assessment models.
The selection process also involves evaluating the financial viability and attractiveness of the investment.
There are two types of impact investing funds, each with different impacts and investment profiles:
2.1. Impact investing funds geared toward the private market
Funds that focus on the private market usually invest in privately held companies, start-ups, or projects with a direct social and/or environmental mission. By concentrating on private market investments, these funds can take a more direct and hands-on approach to increase impact.
They often provide capital and resources to companies addressing specific social or environmental challenges, in areas such as renewable energy, sustainable agriculture, affordable housing, or access to healthcare.
Investors have direct influence by allocating capital (to companies that would otherwise not have received funds), signalling attractiveness and impact potential in the market, and collaborating closely with companies to shape their impact profile and enhance their financial success.
From a financial perspective, these funds tend to be riskier, less diversified, and less liquid. This means that you can’t immediately access your funds and it often takes weeks, if not months, for your investment to become available.
Private market impact funds therefore often attract investors with a long-term perspective, who are willing to accept higher risk and lower liquidity for the potential of greater social and environmental impact. Regulatory restrictions usually exclude the participation of retail investors.
2.2. Impact investing funds geared toward the public market
Funds that focus on public markets primarily invest in publicly traded securities, such as shares and bonds of listed companies. Investing in public markets offers a wide range of opportunities, but it often only leads to an indirect engagement with impact-oriented companies.
Investors' influence occurs through market signals and active participation.
- Market signals: They include signalling effects of publicised sustainable investments, engagements and/or divestments to impact corporate behaviour and practices.
- Active participation or active ownership: This approach involves directly engaging with companies, through collaborations and voting at shareholder meetings, to steer the company toward sustainability.
Impact investing funds targeting public markets generally have a lower risk profile, better diversification, and higher liquidity, allowing you to access your money quickly when needed. This makes them appealing to a broader spectrum of investors, including retail investors.
As an investor, you can align your portfolio with your sustainability goals without having an in-depth knowledge of individual investments or get actively involved.
Compared to private markets, the influence of investors tends to be lower in public markets. One main reason for this is the often negligible if not non-existent capital allocation effect: The company does in fact not receive additional capital just because you or another person owns its shares. It is precisely for this reason that such investments frequently are referred to as impact-oriented investments.
Once the investments are selected, the social and environmental objectives of these investments are monitored and quantified through impact measurement and reporting, regardless of the market the fund targets. This transparency allows you to assess the tangible impacts of your investments and hold the fund manager and the fund's investment strategy accountable.
3. How do impact investing funds differ from other sustainable funds?
There are various other types of sustainable funds besides impact investing funds, such as ESG funds (Environmental, Social, and Governance), SRI funds (Socially Responsible Investing), and SDG-oriented funds.
ESG and SRI funds primarily focus on avoiding companies in controversial industries or those with poor ESG practices. Their main goal, especially with regard to ESG funds, is to minimise sustainability risks for a company's financial balance. They primarily target risk reduction, not necessarily on creating a better world.
In contrast, impact investing funds adopt a proactive approach by targeting investments that actively contribute to positive social and/or environmental change. They not only aim to avoid harm but also prioritise the creation of measurable impacts.
Impact investing funds favour investments that deliver quantifiable improvements, such as:
- Reduced carbon emissions
- Promotion of gender equality
- Improved access to education and healthcare
- Promotion of sustainable development
Impact investing funds aim to drive systemic change and address significant global challenges by directing capital toward impactful solutions.
4. What’s the role of the EU Transparency Regulation in impact investing funds?
The EU regulation on sustainable financial investments and the Sustainable Finance Disclosure Regulation (SFDR) has played a significant role in shaping the landscape of impact investments.
It establishes specific disclosure requirements for financial market participants, including impact funds, to ensure transparency for investors and stakeholders.
SFDR categorises funds based on their environmental and social characteristics into three levels:
- SFDR Article 6: Non-sustainable funds with limited consideration of ESG risks in the investment process.
- SFDR Article 8: "Light green" funds that consider sustainability risks in the investment process and promote environmental or social characteristics.
- SFDR Article 9: "Dark green" funds that consider sustainability risks in the investment process and additionally pursue a specific sustainability goal alongside financial objectives, contributing to environmental or social goals. radicant manages three investment funds that all fall under Article 9. You can find more information on our investing page.
SFDR enhances investor confidence by providing clarity and comparability among impact funds. It encourages impact investing funds to consistently measure and report their environmental and social impacts, allowing investors to make informed investment decisions and align their investments with sustainability goals.
The EU regulations on sustainable financial investments also affect many Swiss financial institutions. In Switzerland, efforts toward greater transparency for investors are driven by investor associations like Swiss Sustainable Finance and other regulations. The Swiss government’s sustainable finance strategy attributes more importance to transparency and impact. Further developments are to be expected as these changes primarily are implemented by the financial industry.
5. Conclusion: Impact investing funds
Impact investing funds have evolved into effective instruments for individuals and institutions aiming to drive positive change while achieving financial returns.
By focusing on measurable social and environmental impacts, impact investment funds empower investors to support solutions to pressing global challenges. With the SFDR in force, promoting transparency and accountability, the field of impact investing continues to grow, attracting more capital and fostering sustainable development.
Impact investing funds focus on private or public markets, which leads to significant differences in impact and investor influence.
The choice between private and public markets and impact investing funds depends on the risk tolerance and the desired levels of involvement. Both approaches have the potential to create significant change and allow investors to contribute to addressing global challenges.
If you want your investments to make a positive contribution to a sustainable future, then radicant is the right choice.
radicant is Switzerland's first digital sustainability bank, offering truly sustainable banking and investing.
radicant uses the UN Agenda 2030 and the SDGs as the foundation for all investments. This ensures that your money is only invested in companies making a positive contribution to sustainable development on our planet. Companies from controversial industries are consistently excluded.
Furthermore, our investment and sustainability experts ensure that your portfolio not only is sustainable, but also well diversified and professionally managed. You can also track how the companies you have invested in contribute to the UN’s 17 SDGs in real time with our proprietary rating system.
Ready for truly sustainable investing and banking? Open your radicant account in less than 5 minutes – digitally, easily, and without paperwork.
