The power of investment: What impact does it have on the world?

The Industrial Revolution marked a before and after in the world. The Industrial Revolution brought about the fall of the Old Regime in the West, giving way to liberal democracies in their embryonic state, which generated an economic opening that paved the way for the creation of financial markets at the end of the 18th century. At that time, GDP per capita barely exceeded $1,000 worldwide. Only 120 years after all these innovations, this indicator had doubled to $2,100. Such a rapid and strong growth had never before been recorded in history.

Capital markets, the modern economy, the rule of law, and, as a result, the era of the highest generation of wealth in the history of humankind were born. In fact, taking global GDP per capita as a point of reference indicates $982 for the year 1500, $1,184 in 1820, and $14,558 in 2015. But how has this been impacted by investments and financial markets?

Economic growth. The primary objective of investing is economic growth. If this were not the case, it would not be investing. A small company seeking to grow needs to invest in its infrastructure. Similarly, anyone looking for a better financial future should save and invest to make their money grow.

Simply put, all the world's stock exchanges have a total capitalization of 80 trillion dollars. Therefore, if companies grow by increasing their earnings, these 80 trillion dollars will grow, and, as a result, the world's wealth will also grow. Ultimately, the main impact of investing is the economic growth of companies, individuals, and countries.

By way of example, a person who invested only $100 a month from 1985 to 2024 in the S&P 500 would now have the equivalent of $220,612 after discounting the effect of inflation. Whereas, if the same person had not invested this amount, they would have $21,284 after discounting for inflation.

Equally, for companies, receiving money from shareholders means having more capital available to further develop technologies and generate social and economic advances. Essentially, investors buy shares in a company, the business receives the money it needs to grow, and, as a result, both the value of the company and the capital invested increase.

Social impact. The social impact of investing can be interpreted in two ways. On the one hand, investing generates a social benefit for people since it increases their wealth. On the other hand, there are investments in projects and companies that improve society.

Regarding the first impact, the example provided above clearly demonstrates the impact of investing in markets as opposed to not investing. In the U.S., 60% of households invest in the stock market, which has driven household wealth to record highs. 

U.S. household wealth hit a record high of over $160 trillion in the first three months of 2024, driven by a rebound in the stock market and gains in real estate. Federal Reserve data show that household net worth increased by 3.2%, or US$5.1 trillion, with US$3.8 trillion derived from stock revaluation.

Regarding the second point, social impact refers to investing in companies or projects engaged in social improvement measures. Today, through impact investment funds, it is possible to invest in companies that advocate gender equality in their workforces or promote the employment of people with disabilities or in situations of poverty, among other initiatives.

Environmental impact. According to the World Economic Forum, achieving zero net greenhouse gas emissions by 2050 will require an annual investment of US$5 trillion between now and 2030. This figure can only be attained through private and public investment. 

The capital can be channeled through investment funds that invest in companies that are developing sustainable technologies, undertaking an energy transition, or innovating new products aimed at achieving zero carbon emissions, among other initiatives.

Therefore, there is a clear impact since increasing investment in these types of companies and projects will help to achieve the goal of reducing emissions. This money will help finance this transition while also generating an economic return for investors. It is worth highlighting that sustainable investment funds that target this objective are currently performing well. According to the European regulator ESMA, ESG equity funds achieved an average gross return (before fees) of 3.3%, outperforming the 0.8% for comparable conventional funds.