Investing

An Introduction to Impact Investing

Impact investing is an investment strategy that aims to generate financial returns while also cultivating positive social and environmental impact.

The world of investing is increasingly growing and changing with the times. While the concepts of philanthropy and investment have entirely contradicting objectives–one pushing towards social change and the other advocating for financial gain–we’ve reached a point in society where it’s become essential to bridge the two. Impact investing can be this bridge.

Impact investing is an investment strategy that aims to generate financial returns while also cultivating positive social and environmental impact. When impact investors seek out businesses to invest in, they consider its commitment to corporate, environmental, and social responsibility. This investment strategy offers companies a financial incentive to commit to these values and ensures more companies give back to society.

These kinds of initiatives are particularly attractive to millennials and younger generations. As such, impact investments are likely to surge and gain more influence in the market.

Impact investments can fall into two categories: concessionary and non-concessionary. Concessionary impact investments prioritize social impact and do so even for a low return. Non-concessionary impact investments, commonly referred to as “double-bottom line,” aim to generate high returns in conjunction with establishing social change.  These returns are starting to reach heights equal to conventional investments, further proving their potential.

Types of Impact Investments

Impact investors may choose to invest in emerging markets or developed economies. These typically include industries such as healthcare, education, sustainable and renewable energy, agriculture, among others.

The two main approaches to impact investments are socially responsible investments (SRI) and environmental, social, and governance (ESG). ESG investing incorporates positive environmental, social, and governance practices but ultimately maintains the objective of financial gain.

In contrast, SRI, commonly referred to as sustainable investing, focuses on environmental and social causes. The main objective of SRI is the avoidance of harm. These investors seek out companies that share their views on human rights, environmental protection, and consumer responsibility.

As ESG investors aim to create a financial analysis by identifying potential risks and opportunities, SRI selects investments based on specific ethical guidelines that are not limited to religious and political beliefs.

Benefits of Impact Investing

Contrary to initial belief, impact investing has proved to be a profitable venture, even though investors might deliberately choose investments that may provide a below-market return. A 2017 report by the U.S. SIF Foundation found that 90 percent of studies on impact investments show a non-negative corporate financial performance.

Although some investors do seek companies with low market returns, the truth is that over 60% pursue competitive returns that either perform in line with their expectations or at times out-perform their financial expectations. This only debunks the theory that sustainable, prosocial businesses cannot be seen as profitable.

The main benefit of impact investments is the ability to positively affect environmental sustainability, social issues, and governance concerns as they exist within the business sector. As more investors commit to putting their resources into companies that make social change an essential part of their business practices, the more companies will align with these values, leading to a massive shift in societal expectations.

Being champions for change, impact investors are challenging the idea that bottom-line thinking should come before social impact.

On the receiving end, the obvious benefit of impact investments for the businesses is that they can gain financial support. They may also feel empowered and encouraged to propel their social initiatives even further, knowing like-minded investors align with their values. They can now thrive in the competitive business market even while making decisions that don’t necessarily prioritize making a profit over social change.

Conclusion

Connecting the world of philanthropy and investments may seem like an unlikely pairing, but the potential outcome can have an extremely positive effect on the state of society. Should an impact investor pour their resources into businesses with socially responsible initiatives and practices, this will only inspire more companies to do the same.

That being said, the “greenwashing” of investment funds and other major industries as a marketing tool is running rampant in society today. As a result, many investors have to be much more diligent in choosing their indexes to ensure companies’ values and ethics are truly in alignment with their own.

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