Until now, doing good for humanity did not feel like a number one priority for private companies and investors. Their mission was to increase profit, while NGOs and governments were focused on doing good. With the growing power of capital and our understanding of the dependence of economic prosperity on social and environmental stability, Impact Investing has been gaining momentum worldwide. Companies, consumers and governments are all embracing this new standard of industry, measuring a company’s prospect not only based on its ability to generate capital, but on its commitment to making the world a better place.
Making profit differently
Impact investments is a new term for a concept under many names, such as social investments and blended value. According to the Global Impact Investing Network (GIIN), this approach is all about investing in companies and organizations with the intention to generate social and environmental impact alongside financial return. In other words, it is a commitment to measure and report the social and environmental performance of the investments, such as carbon emissions, support of minorities, or employee conditions. The dominant notion was for long that addressing social challenges is the province of governments, philanthropes, and non-profit organizations; market investments were expected to focus exclusively on financial returns. However, recent global crises like the COVID-19 pandemic have made it clearer than ever that the financial system is tightly intertwined with sustainability and social conditions.
The growing popularity of social and environmental impact investments
Fortunately, the last few years have seen a tremendous change in our attitude towards the market. Institutional investors, which have become the largest holders of shares in public companies globally, are modifying the criteria based on which their money is funneled into enterprises. Banks, pension funds, and wealth managers provide investment opportunities for clients interested in social and environmental causes. Policy-makers are starting to acknowledge the importance of building market infrastructure that can help bridge capital and positive impact, as well as the role of governments in creating social impact markets and participating as co-investors.
Among the different targets of impact investing is Social Impact Investment (SII). The world is increasingly aware of the potential opportunities of SII. In fact, in 2013 the UK hosted the G8 Social Impact Investment Forum in London, launching the Social Impact Investment Taskforce to provide new and innovative ways to allocate public and private capital in a fashion that would address social challenges at the global, national, and local levels. With this goal in view, many impact investors are on the rise. For example, US-based New Age Capital is a seed stage venture capital firm investing in tech startups founded and led by black and latino entrepreneurs. They prioritize equality, opportunity, the democratization of information and the breaking down of boundaries, through the use of technology. In comparison, a financial technology company called Ellevest invests in women. Led by Sallie Krawcheck, this platform helps women build the financial futures they want by advising their investments, entrepreneurial ventures, and savings plans.
Hand in hand with social impact is environmental impact investing. There is a growing interest from investors in creating environmental impact through investments in a wide range of sectors including clean tech, green construction, sustainable forestry and biodiversity conservation. It is not enough to favor companies and products that minimize harm; investors are looking for those who intend on having a positive effect on the environment. For instance, Farmland LP is a real estate fund that acquires conventional farmland and converts it into organic, sustainably managed farms, by means of science and technology. Their model benefits farmers, investors, consumers, and of course, the environment. Riccardo Pozzoli, an entrepreneur and impact investor, is constantly on the lookout for investment opportunities in sustainability. Among his partnerships is Treedom, the first web platform in the world for financing agroforestry projects around the world, thus supporting farmers and making the world greener.
The challenges and the silver linings
Despite the growing enthusiasm from all sides, there are still major challenges to overcome before impact investments can become mainstream and attain their full potential. First, it is crucial to develop precise and transparent methods of measuring the impact. In order to convince investors to direct their funds to this sector, they need to understand where their money is going and what it is doing. Impact investments expect organizations to operate efficiently and transparently, since their capital is supposed to generate profit. Another challenge is that, as in every sector, social and environmental projects are full of risk, especially when revenue is only a small part of the equation. Reducing risk for investors and increasing liquidity, or their ability to sell on an investment, is essential to bring in more money and create a sustainable relationship.
That said, the future of impact investments looks bright. Morgan Stanley’s Institute for Sustainable Investing has reported in 2015 that social impact investing is as profitable as traditional equity funds, if not more. Besides, as Millennials start to gain more and more wealth in the market, this sector will continue to grow: 90% of Millennials would prefer a brand associated with a cause, and it is safe to suppose that their investments would reflect these same values. Indeed, the Social Impact Investment Taskforce has suggested that impact investing could easily start to move from a niche sector into the mainstream. This could be achieved with just a portion of the money currently in environmental and social investments shifting into impact investment.
Impact Investments reflect a change in the way we envision the market and our responsibility towards others. Investing based on the intention and ability to benefit society and the environment, and not just to make profit, could help create a more sustainable and healthy economy, and change our values as a society. Once we resolve the many challenges this approach faces, the day is not far when doing good will become a pillar of the economy.