One thing you will come to realise about investing is that there are a number of ‘themes’ or approaches to investing and while the end goal is the same which is financial benefit in its simplest form, it also presents a way for an investor to stay true to their convictions through what they invest in.
What is Impact Investing
Impact investing can be described as putting financial resources in companies that have a social mandate; for example companies that are involved in industries that improve the human condition.
The aim of impact investing is to use the money or any investment capital in such a way that there are positive social outcomes for people and the environment. Impact investors will place their capital in businesses such as non profits, renewable energy, basic services such as housing, education, sustainable agriculture or microfinance.
Some well known investors choose not to invest in companies that engage in military activities and in some cases this distinction is not clear because companies like Boeing and General Electric are involved in commercial and military spaces. In some other cases they choose not to invest in Tobacco or Cigarette companies not because it is going out of fashion but because of the harm it causes to customers who use their products.
What are the Returns
Impact investing is a growing industry and is still growing. By some estimates, the size of the market is $715 billion and is projected to grow. See more details here.
Investing for the benefit of people does not diminish the need for a financial return. Impact investing also takes the social impact into consideration. Rather than simply looking at how the EBIDTA, ROI, ROE or any other metrics, impact investments will also look at metrics that will determine how ‘impactful’ the investments have been over a period of time.
A large number of companies are committed in one form or the other to socially responsible practices and as a result the investors benefit. A study by GIIN shows that over 90% of impact investors saw their investment surpass their projections.
This trend is likely to continue for the foreseeable future as Millennials and other younger generation are more socially aware of issues and look for a way to give back or support the relevant companies in this space. As more individuals realise the positive outcome of impact investing on the environment, people and their wallets, these investments are likely to grow.
Why consider impactful investing?
There are a number of ways to approach this and a myriad of answers however the simplest is often the best.
Growing inequality is becoming a problem in the developed world and globalisation, movement across borders, lack of access to basic amenities, we see an increase this inequality to grow.
A lack of access to food, education, health facilities among other things can mean families around the world are living on the bare minimum and as the rest of the world advances, these people are left behind.
In developed economies, this problem of inequality exists. While most people will have access to health facilities, food in most cases and education, the emphasis here is on the quality of the services they get, the opportunities that are available to them and how they take advantage of them.
One way to fight inequality with money and still see a non-monetary return on the investment is through impact investing. By investing in companies in these space, you have better insight into the company, its books, the managers, how they allocate resources, what their focus is and other aspects of the company.
Pension Funds, Bank, Wealth managers and Financial Advisors can provide opportunities to their clients that will allow them to invest in companies that have a positive social impact.
South East Asia and India in the last decade have seen large investments in the impact investing; according to McKinsey, over $1 billion dollars has already been invested in India as of 2016 while South East Asia between 2007 and 2017 has seen $904 million from Private Impact Investors and over $11 from Development Finance Institutions. More details can be found here.
Who is in the Space?
Right now a number of companies are making investments and there are no restrictions to who can be involved. Religious, Non-Governmental Organisations, (NGOs), Family offices, Private Foundations or even individual investors are investing in this space.
The Catholic Church has seen an increased interest in impact investing and other development finance institutions such as the Norwegian Norfund, British Commonwealth Development Corporation can be considered as impact investors since a portion of their portfolio is allocated to investments that have positive environmental, social and financial gains.
Historically, impact investing could be accomplished through a number of mechanisms in place for institutional investors however, for individual investors there are a number of ways to participate in these ventures. ETFs (Exchange Traded Funds) such as SPDR Gender Diversity ETF or iShares MSCI ACWUI Low Carbon Target ETF can be publicly traded and offer an opportunity to invest.
How is it different from SRI
Socially Responsible Investing primarily looks investing in companies or investments that have positive social impact and avoid harm – it is also called Green Investing. Investors in SRI do so with the view that Human Rights are not violated, the environment is preserved and the customers benefit from the produce. SRI can be viewed as a subset of Impact Investing.
Final Note
Impact investing allows investors to put capital in companies that are positively impacting the lives of people. These could be companies in microfinance, agriculture, healthcare or education sectors and the focus for the impact investor is not just financial returns but positive social and environmental impact.
As more investors become socially aware of the issues around how Business is done, we see an increase in impact investments. It provides an opportunity for investors to be more conscious into what they are investing in and what the social benefits are, rather than financial benefits only.
