Digitization and sustainability are the defining business issues, and impact is a mandatory management task in 2021 and beyond. How can you have a sustainable impact through sustainable investment?
Those who want to invest in ideas and companies with a sustainable impact see many attractive offers in the shop window and not infrequently finance shams. Impact investing offers an alternative. Here, the sustainable impact of the investment is continuously measured and communicated. A concept that is worthwhile for entrepreneurs as well as their investors.
“Every government, every company, and every investor must address climate change.” This sentence might have come from Greta Thunberg, who first demonstrated in front of the Swedish parliament on August 20, 2018, calling for radical steps to address climate change. But it comes from Larry Fink, CEO of BlackRock, the largest and most powerful asset manager on Earth. Read about it in his letter to executives around the world. BlackRock declares sustainability to be the new investment standard. Environmental organizations from Germany and France doubt the seriousness of this intention in an analysis presented at the beginning of 2021 and accuse BlackRock of greenwashing.
Sustainable investments are booming – including fraudulent packages
Nevertheless, Larry Fink’s promise of sustainability has tremendous appeal. After all, a company like BlackRock, which has stakes in over 50 stock corporations in Germany alone, is not booking a ticket for the future journey of the economy in the New Normal, but is defining the route. And the financial sector is following suit. On April 21, 2021, the Net-Zero Banking Alliance (NZBA) was launched under the umbrella of the United Nations with over 45 banks from 23 countries. Its members, including Commerzbank, Deutsche Bank and GLS Bank, are committed to reducing emissions from their operations and portfolios to net zero by 2050 at the latest. Future figures that promise a lot, but are currently rather rarely visible. At the same time, the buzzword sustainability is attracting an enormous amount of capital. According to the BVI, the assets of sustainable funds managed for German customers rose by €107 billion to a record €254 billion in Q1 2021. More and more investment options are appearing that sail under the striking sustainability flag. Many of these shares, bonds or funds promise a lot of green and responsibility. But they often do not stand up to closer scrutiny. The magazine ECOreporter, which has been providing information on sustainable investments since 1999, regularly exposes top ETFs as more or less well-made deceptive packages in its tests.
Sustainability is relatively quickly staged, a very flexible term with which it is easy to advertise. Companies and financial providers that act in this way may be able to secure quick windfall profits at the moment – but they and their products will not survive in the long term. On the other hand, companies that consistently implement and further develop ESG (environmental social governance) criteria not only support urgently needed global goals, but also invest in their own economic and personal future. The MSCI World Socially Responsible Index (SRI), for example, which bundles the approximately 400 companies with the highest ESG ranking from 23 industrialized countries, is proving to be very crisis-resistant with an impressive growth curve. But what investors often still lack is the clear as well as continuous measurability of the sustainability of the entreneurship they support with their investment. After all, it is not only holistic management that should be worthwhile, but also the belief of investors in this principle.
Impact investing makes sustainable entrepreneurship transparent
This is where impact investing comes in, creating a measurable set of values for investors as well as the financed companies. Impact is the effect achieved by the investment. A combination of positive financial returns and positive effects on the environment and society. Impact targets are clearly defined when the investment is made, accompanied by continuous measurement of the investment throughout the agreed period. Sustainable investment is not risk-free, even with impact investing. But it offers the possibility of a return, supports specific environmental as well as social positive outcomes, and also promotes highly interesting ideas. It is often start-ups and industry innovators that rely on the financing model of impact investing. Those who enter as capital providers here often accompany successful future-driven initiators of change.
The formula of impact measurement: clear goals, detailed reporting
The Sustainable Development Goals (SDGs) of the United Nations play a central role in the impact measurement of the respective investment. They define 17 goals for sustainable development and are linked to a binding treaty. In 2015, all 193 UN member states committed to achieving the SDGs by 2030. The German roadmap can be viewed in the German government’s sustainability strategy. And more and more business players, startups, SMEs and corporations, are joining UN Global Compact, the world’s largest initiative for responsible entrepreneurship. The SDGs are a policy framework that is increasingly becoming the future DNA of many companies. They are already declaring in which of the 17 SDG areas they are making a concrete positive impact. Some go a step further and publish shortfalls as well. This makes SDGs verifiable indicators that map sustainability and turn it into a measurable value.
Impact investing incorporates the respective SDGs. But the actual impact measurement is even more detailed and transparent. The measured company has previously defined its own targets in the respective SDG areas and substantiates the impact to be achieved with figures. This enables a target/actual comparison that shows the real progress. The measurement consistently includes both positive and negative indicators. Through continuous reporting, changes in both directions become immediately visible, in contrast to random sampling. In impact investing, this reporting is based on a consistent set of rules and information about the quality of the data collected.
The practical example: How measurable impact contributes to success
One example that illustrates the sustainability measurement in impact investing is the financial investment of VinoKilo. Through a tour concept and cooperations with industry partners, the company from Bodenheim near Mainz offers curated high-quality second-hand fashion throughout Europe. Vintage fashion, still rather a niche product a few years ago, is the antithesis of fast fashion and is becoming increasingly popular. The company’s concept shows that sustainability and economic success go very well together:
The startup is recording average growth of 92% (CAGR) and is planning sales of 16 million euros in 2021 (2020: 6 million euros). At the same time, for example, the business model could save at least 101,832,607 mj of energy – equivalent to the consumption of around 47.1 million washing machine cycles.
In measuring the investment with a 12-month term and a return option of 7% per year, the focus is on SDG target 12 (Responsible Consumption and Production). The company consistently reports the reduction achieved in water, energy and CO2 consumption. Constantly published figures for customers and investors, with additional illustrative examples showing the sustainable effectiveness of the company’s concept. An exemplary investment opportunity that illustrates the value of impact investing and continuous measurement.
Impact is work – and a future deal that pays off for everyone
Impact Investment expects the financed companies to substantiate their sustainability claims with figures and convincing actions. In return, investors receive the certainty that their money is actually being used to achieve an ecological and social impact in addition to the option of a return. Impact investing has long since ceased to be an investment for pure idealists. It is an opportunity to support the many possibilities of sustainability in the New Normal and to experience it as a very real gain. A deal for the future that pays off for everyone.
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