My willingness to work in the financial sector and having a life in line with development goals, driving public good have led me to the Masters program at Bocconi University. During this study program, I got introduced to a model, “impact investing”, which brings the best of two worlds, perceived very distinct from each other for so many years. Traditional investors were now considering the search for “double bottom line” in their investments which is the evaluation of financial impact together with social and environmental impact.
When impact investments started to come to surface in the markets, Gen Y and Z members were being affected by the damaging consequences of the 2008 crisis. These consequences caused a significant shift in perspective and made both generations to look out for public interest in the things they do. For example, behavioral changes such as decrease in consumption of meat, preference of environmentally friendly cosmetic brands that doesn’t test on animals, shopping at small merchants, were started to be clearly seen at both generations. These individuals’ willingness to work with people and institutions who share their personal values and preferences in every area of their lives, is also a part of this evolution. As a result, it’s crucial for them to know that they can use their assets to create a positive social or environmental impact with their investment decisions.
Impact investments offer a promising future not only in developing countries where they were first seen, but also in developed countries which have a growth model based on innovation. Through impact investing, innovative solutions that are looking out for different needs of the society and that are past the early stage investment, will find the chance of quickly growing.
When we analyze the future of impact investments, those who will be especially shaping the space, will be these two generations. However, raising the awareness of these individuals who already have the perspective to support impact investments stands out as an important action to be taken. Also, financial literacy plays an important role in individuals’ investment and saving decisions such as willingness to trade in financial markets and understanding pension plans. Increasing the financial literacy will increase the interest in impact investing as well.
How can financial literacy be tested?
Lusardi and Mitchell, in their article published in 2011, considered that financial literacy is linked to three main economic notions. These are compound interest, inflation and risk diversification. In order to test these notions, they have created the below 3 questions which are used frequently in the financial literacy field. Now, you can ask these questions to yourself:
1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a) Exactly $102
b) More than $102
c) Less than $102
2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
a) Exactly the same
b) More than today
c) Less than today
3) Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
Source: Lusardi, A., & Mitchell, O. (2011). Financial literacy and planning: Implications for retirement wellbeing. NBER Working Paper Series(17078).
In relation to this, some action items that are used in increasing financial literacy rates, can be also used for raising awareness on impact investing. These items can be summarized as follows:
Usage of technology
Fintech/banking mobile applications and digital personal assistants help crowds to manage their financials more consciously. Apart from these, individuals can interact with service providers that fit the best to their needs through open banking applications. Impact investments can be offered as an investment option in these mobile applications and users can be informed with the right usage of communication language.
Construction of trust
Provision of correct and transparent information while presenting financial services by relationship managers, can play an important role in overcoming the existing trust issues of Gen Y and Z, and in raising awareness. Notably, notions such as “greenwashing” have created a link between the social responsibility projects of the private sector and negative feelings. Impact investments should be explained candidly to potential investors and personnel in all detail by relationship managers.
Creation of the strategic infrastructure by the government and relevant public entities
Courses of home economics and basic finance provided at public universities, local public authorities enable an increase in financial literacy of especially youngsters. Once a national strategy is formed around the country on impact investing, not only individuals but also public and private sector entities of all sizes can move forward steadily with a common goal.
Many actors in the financial sector play a role in increasing the knowledge in finance. Potential partnerships between public and private entities, can support the willingness of these generations to participate in impact investing, to promote the system to their network and perhaps to work in the field.
Etkiyap platform by working on various projects in line with these action items for those who would like to learn more about the subject, targets all generations to take a role in the ecosystem both in Turkey and in the world. If you would also like to learn more about impact investing, you can always reach out to us.