Impact investing has been an increasingly dominant topic in the industry as its multifaceted approach in driving profits and social as well as environmental change begin to catch on. SRI and ESG are two other related aspects that have some fundamental similarities.
SRI, or Socially Responsible Investing, refers to investments in organizations/companies that don’t market a negative commodity such as the tobacco industry. It could be referred to as ethical investing in that sense. ESG, or Environmental, Social and Governance, holds companies accountable to a certain standard in regards to corporate practices such as employee management and dealings as well as accordance to environmentally friendly practices.
Impact investing to address global issues and providing a long term/sustainable infrastructure to alleviate them in a variety of ways. According to Fran Seegull, CIO of ImpactAssets, “By harnessing the power of capital markets and focusing on maximizing stakeholder value (not just shareholder value), impact investing addresses the systemic challenges of poverty, income inequality and climate change.”
Impact investing has been getting more attention as investors seek to maximize their expenditures not just financially, but to see social provisions being more widely available to those who lack and require it the most.
In an interview with Next Billion, GIIN CEO Amit Bouri stated, “Ultimately what motivates people to become impact investors is the impact that they can have, so I think that as we build more of a track record around financial and social performance, we will continue to motivate and energize more people to get off the sidelines and become active as impact investors.”
GIIN, or Global Impact Investing Network, is one of the foremost leaders behind impact investments. Contrary to the traditional notion of operating purely for profit, impact investing combines financial returns as well as providing social and environmental rewards. Generally, impact investments are made with an emphasis on improving health care and education while on the environmental side, they focus on mitigating issues like climate change and pollution.
It is understandable that impact investing often gets confused with charity or philanthropy. While the efforts of charities are certainly commendable, they tend to focus on one issue and this doesn’t address the most pressing concerns that require assistance. Limited funding also tends to be another weakness, as organizations are constantly scrambling to raise sufficient funding for overhead and staffing expenditures, all while squeezing every penny to create and execute campaigns designed to further advocate their social cause.
As opposed to donating a large sum to a charity or foundation, impact investment experts can utilize those funds to ideally establish a sustainable source of returns and social or environmental impact. As the industry is constantly changing and different opportunities arise, it will require the expertise of investors to gauge the prospects of and identify prime investment opportunities that align with a company’s core of improving the world.
For example, education is emerging as an industry ripe for impact investments as curriculum gradually incorporate technological improvements into the classroom and learning environment.
Darden School of Business professor Elena Loutskina summed up and addressed the concern perfectly. If a U.S. company donated a pair of shoes to Africa for every pair that they sold, some may think it was a model of impact investing in that it provided a social benefit alongside a financial profit.
Johnson states that this type of thinking is incorrect, as the shoe company could simply pull the plug and put a screeching halt to their donation program. A legitimate sign of impact investing is an alignment between providing social or environmental benefits as part of their core business. In other words, it shouldn’t be something that can simply be pulled without any impact on the business.
Promoting a Healthy Community
“We don’t see a binary “either/or” situation when it comes to achieving financial and social returns. It’s “both/and,” said Rick Scott in an interview with Goldman Sachs. This sentiment is certainly gaining some traction, especially as millennial entrepreneurs have bigger goals in mind than just returns on their capital. They tend to be more involved and take a more active role in global and local issues, and they present a growing number of ideal catalysts to the scene.
Impact investments are made with an overall goal in mind, of which global warming and green objectives are certainly high on just about any comprehensive list. Many organizations are emerging on a platform of providing social benefits such as providing affordable healthcare and access to education, for example.
XPO2 is one such technology-based marketing firm that utilizes a white label e-commerce platform to raise funds for NGOs and charities around the globe. By providing exclusive access to discounts and deals to supporters who make purchases on the XPO2 platform, funds are directed to the organization of their choice, which include many NGOs promoting social and animal welfare among others.
XPO2 developed this innovative system in order to boost fundraising while providing donors with exclusive benefits. This ensures a stable source of donations for NGOs and charities to continue operating and providing social improvements to their communities in crucial areas like health care, education, and social wellbeing.
The for-profit organization only gets a small piece of the pie, but the overall satisfaction and reward lies in funding NGOs around the world that promote sorely needed social provisions for many impoverished areas.
Leapfrog Industries is another impact investor that invests in AllLife, who provides life insurance, particularly those with HIV/AIDS in Africa. Ironically, insurance rates are unaffordable or worse, completely unavailable, to those who need it the most as they are designated as high-risk cases and are often one mishap away from utter destitute. This gives them a chance to slowly rebuild their life while having the emergency financial backing to do so.
All About the Returns
Robert Rubinstein of Triple Bottom Line Investing discussed some of the challenges and of impact investing, including some advice on impact investing. He cited the reluctance of initial investors and the difficulty of getting people to think more long term as opposed to short term goals, adequately using a comparison of hunters and farmers. Hunters focus on what’s in front of them, as that’s they’ve grown accustomed to and proficient in, while farmers focus on long term, sustainable growth.
“Impact investing is akin to farming. The financial sector are hunters. They are incentivized for short-term behavior. It’s difficult teaching farming to hunters. It takes time. But that’s what we’ve been doing with TBLI.” It’s somewhat akin to losing sight of the forest for the trees. Impact investing focuses on long term forecasts and social benefits, and increased coverage and visibility are sure to drive it even further.
Ideally, impact investment opportunities represent a win-win situation where financial and social impacts can be achieved. The broad scale includes many impact investors who veer towards social gains as opposed to a pure profit. There seems to be a growing number of investors willing to prioritize social and environmental gains as opposed to receiving immediate return on capital.
Asia is rapidly becoming more involved in impact investing, with the most recent addition of South Korea into the Global Social Impact Investment Steering Group. It seems as though Asia has been slow to embrace the scene as they have a tendency to make local investments in lieu of broader, global opportunities.
However, this trend seems to be changing as Joost Bilkes, Credit Suisse’s Asia-Pacific impact investing head speculates that Asia could represent over a third of all impact investment expenditures around the world. South Korea’s government previously announced a 5-year $276 million social impact fund that would help drive local social driven corporations and initiatives.
Younger entrepreneurs are another important component to this drive, as they have a more global mindset and look to provide more worldwide benefits congruent to investments.
Forecasting Impact Investments
GIIN’s Annual Impact Investor Survey 2017 revealed some insight into investor expectations and overall satisfaction:
- 66% risk adjusted market rate returns
- 18% below market rate returns: closer to market rate
- 16% below market rate returns: closer to capital preservation
- 98% of portfolio performances were in line with or exceeded impact performance expectations
- 91% of portfolio performances were in line with or exceeded financial performance expectations
208 respondents reported a total $114 billion in impact assets, with 205 respondents having invested $22 billion in 2016, increasing to $25.9 billion in 2017. Out of 155 respondents polled on the motive behind social and environmental impact barometers, 95% agreed that a very important reason for measuring social and environmental impact was because it was part of their mission to understand the social and environmental performances of their investments.
With an increasingly positive reception and supportive figures, impact investing looks to be the future of the industry with the potential to transform and improve the world while doing so.