What Is Impact Investing?
Whether you struck it rich winning the lottery or you worked your whole life to graduate a four-year institution, you’ll end up with substantial monetary gain. Regardless of how you got your money, though, investing it can go a long way. There are as many ways to invest as there are things to invest.
One of the most talked about ways is something called ‘impact investing.’ Impact investments “are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”
Each individual is free to invest in either emerging or already developed markets. Depending on how an investor is strategizing to gain return from below market to market rate (fancy way of saying ‘buy low, sell high’).
The specific industries targeted for impact investing are those whose goal it is to address the world’s more immediate concerns. The targeted industries for most investing this way are sustainable agriculture, renewable energy, conservation, microfinance, and affordable housing, healthcare and education.
There are a couple of ‘main characteristic’ to impact investing. According to the Global Impact Investing Network, those are:
How an investor plans to have a positive social or environmental impact is just as important as the investment itself. Consider positive intention the overall mission statement the impact investing.
2. Investment with Return Expectations
While the investment is made to effect social and/or environmental change, savvy investors still expect a return. Even if there is no financial return on capital, most will seek out no more than a return of capital.
3. Range of Return Expectations and Asset Classes
Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.
If you are looking to get into impact investing, ensure that the company you are investing in has a dedicated commitment to corporate social responsibility. It is important to see whether or not the company is deserving based on whether or not their impact on society is positive.
Why Impact Investing?
The better question is why not? The issues being addressed by impact investors affect the entirety of the human race. Before the time of impact investing, such actions were expected of philanthropists like Bill Gates or Oprah Winfrey.
Thanks to the multiple opportunities for investors to help and get their returns at the same time, there’s no need to focus exclusively on your ROI.
There are a couple of motivations for impact investors:
- Banks, pension funds, financial advisors, and wealth managers with an interest in social and/ or environmental causes.
- Institutional and family foundations all possess greater assets that can aid an investor in pressing forward with their social/environmental goals, while still getting a decent return.
- Government investors and development finance institutions are able to provide a ‘proof of financial viability’ for investors aiming to tackle certain social and environmental goals.
People from all walks of life have looked into impact investing, including private foundations, family offices, NGOs, and religious institutions.
According to a 2017 survey of impact investors, their goal was to pursue ambitious returns, preferably at market-rate. That same survey showed that investor portfolios both met and exceeded expectations for both their social and environmental impacts. This was a result of investments into emerging markets, developed markets, and the overall market.
Risk in impact investing has a very low percentage, save for the business model execution and management. It is cited most as the biggest contributor to investment risk.
While the industry of impact investment is still relatively new to some, many investors have been part of it for 10+ years. The hope for the future is better efficiency and scaling.
Still not sure about impact investing and if it’s for you? A report by UBS cited findings from a study conducted by Harvard Business School in 2011: “enormous amounts of academic research have been published about the financial performance of sustainable investment funds over the past several years. The literature concludes that sustainable investing strategies perform about in line with market benchmarks.”
If there is an opportunity to make an impact investment for a social/environmental issue you feel strongly about, do not hesitate to jump at the chance. The only way to make a difference is to work together, and those in the impact investment industry are showing by action the importance of collective effort.