The music business is no stranger to riding on a rollercoaster of game-changing trend after trend.
Beginning in the 16th century, musicians worked for wealthy, aristocratic families, kings, princes, and churches. At one point, Bach and Haydn were hired as Kapellmeisters to manage their patrons’ private orchestras. During the next few centuries, it wasn’t uncommon for these musicians to work as freelance composers and perform concerts to support themselves, especially as noble families were losing economic power.
The next disruption came with the arrival of recorded music and radio broadcasting, allowing music to be enjoyed beyond live venues. Major record label companies emerged in the years that followed.
Fast forward to the 21st century, the digitization of music and Internet distribution threw another curve ball at the industry. Physical sales have dropped, consumers traded in their CD players for MP3 players, and musicians found fame through the Internet.
For better or worse, the finance industry is also riding on a few of its own potentially game-changing trends.
In a new research paper entitled Making Impact Investible, Maximilian Martin, founder of Impact Economy, describes four “megatrends” that are driving new investment opportunities relevant to impact investing, defined by the Global Impact Investing Network as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return”.
1. Massive pent-up demand at the “bottom of the pyramid”
It’s open doors for private enterprises to bring their market-based solutions to persistent problems – such as health, finance, and housing – at the bottom of the pyramid (BoP), where little success has been achieved by aid agencies and donor organizations.
There’s an estimated US $5 trillion in latent BoP demand and a population of around 4 billion people ready to “graduate” to the middle class.
To build the domestic economy, Martin says that in most cases, companies that have products or services to offer BoP populations can simply drive out inefficiencies and create profits. In other cases where markets are harder to penetrate, such as healthcare, private-public-nonprofit partnerships can be formed to mobilize capital.
2. Radical resource efficiency and green growth
The World Economic Forum and Bloomberg New Energy Finance estimate a need for low-carbon funding of US $500 billion per year by 2020 in order to limit global warming to two degrees Celsius, which is far from the US $243 billion invested in clean energy in 2010.
Regardless, having a global population of 9 billion people by 2050 will test the limits of natural resources and demand investments in energy efficiency.
Martin says the one area that will pay off fast is by investing in street lighting, where 20 percent of the world’s electricity is used. The costs of using LED lights can generally be covered from savings in 36 to 72 months. These lights can reduce energy usage, maintenance costs, and emissions.
3. Restructuring the welfare state to drive efficiency
Similar to the previous trend, changes in population are driving the need to restructure the welfare system.
Life expectancy has increased by 21 years since 1950 and for many developed countries, total public benefits as a percentage of GDP is expected to rise. In Australia, Canada, Japan, Sweden, Switzerland, the UK, and the US, total old-age benefits are projected to grow to between 15 and 20 percent of GDP by 2040. At the same time, challenges such as poverty and recidivism are adding to the financial strain of the welfare state.
As a result, new financing mechanisms have begun to emerge. Take, for example, social impact bonds (SIBs), a tool considered to be the flagship instrument in keeping the welfare state fundable. It’s based on a collective effort with government, investors, and social services providers where each party is incentivized to tackle a certain problem, such as reducing recidivism rates. Governments aim to reduce costly programs and increase effectiveness of social services, investors benefit from portfolio diversification and a chance to receive financial returns alongside social impact, and social services providers have access to new capital.
While there is yet to be enough evidence on the promise of SIBs, Martin says that achievement to greater resource efficiency will result “in some form of market-based solutions” nonetheless.
4. The rise of the “Lifestyles of Health and Sustainability” (LOHAS) consumers
LOHAS consumers are described as those who use purchases to reflect their personal values and positively influence society. The LOHAS market is estimated to be over US $300 billion and growing at 10 percent per year.
This trend shows no sign of slowing down. In emerging markets, consumption is predicted to grow by 150 percent from 2010 to 2025, compared with 31 percent in developed markets. And the nature of emerging market consumers is different than that of developed markets. Emerging market consumers are less sensitive to higher prices of green products and services.
In emerging markets such as China, India, Malaysia, and Singapore, data shows that 84 percent of consumers would pay a premium for eco-friendly products, compared to 50 percent of consumers from France, Germany, Japan, and the US.
The consumer demand is so strong that Edelman labels them “Purpose Bull Markets”. Still, Accenture warns, “with the exception of products and services that are niche, clearly offering added value or representing genuine innovation, the market for purposely designed sustainable alternatives will not likely command premium prices in the long run.”
“Making Impact Investible” can be accessed on the Impact Economy website.
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