Roots investing refers to a form of impact investing that aims to generate both financial returns and positive social or environmental impact. As a subset of impact investing, roots investing focuses on directing capital towards solving social and environmental issues like poverty, climate change, lack of access to healthcare and education. Over the past decade, impact investing and roots investing have gained significant momentum as investors increasingly look to align capital deployment with purpose. According to the Global Impact Investing Network (GIIN), the global impact investing market size was over $715 billion as of 2021.
Roots investing aims to tackle pressing global issues while also pursuing market-rate or even above market-rate returns
The core premise of roots investing is that capital can be intentionally directed to create measurable positive impact beyond financial returns. Areas like renewable energy, microfinance, sustainable agriculture, affordable housing and healthcare are key sectors where roots investors have allocated capital. For example, Acumen Fund, a non-profit impact investor has made long-term investments in companies providing agricultural inputs, water, and energy access to low income communities across India and Africa. Roots investors like Acumen measure the impact created through metrics like increase in farmer incomes, clean energy units deployed, number of households with clean energy access and so on. A key point is that roots investments are expected to generate market-rate returns in addition to the socio-environmental returns.
Roots investing contrasts with ESG investing in its intentional focus on impact
Over the past few years, there has been a major push towards ESG (Environmental, Social and Governance) investing across the financial sector globally. Top asset managers like BlackRock now offer ESG-based investment products to clients. However, ESG investing is more focused on integrating ESG criteria into investment analysis and portfolio construction rather than intentionally directing capital towards solving social or environmental problems. Of course, there can be an overlap where an ESG investment also creates measurable impact e.g. investing in a wind energy firm. But the intentionality piece and focus on impact measurement is far more ingrained into a roots investment strategy compared to plain-vanilla ESG investing.
Government policies and involvement of development finance institutions critical for growth of roots investing
While roots investing is seeing rising interest, it still remains a very small fraction of global AUM (assets under management). For the market to scale significantly, stakeholder alignment and supportive government policies are critical. Development agencies like CDC in the UK, development banks and organizations like USAID, DFAT in Australia which have significant budgets for international development aid and investment – their involvement can greatly accelerate the growth of roots investing globally.
In conclusion, roots investing as a subset of impact investing directs investor capital towards market-based solutions that solve pressing socio-environmental issues while also generating financial returns. It has the potential to channel large pools of private capital for public good and scale exponentially in the years ahead.