Impact Investing

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Impact Investing.

Introduction

Impact investing is defined as the investment process made with the intention to generate positive social and environmental impact that can be measured, along with positive financial performance. The main point of impact investing is to utilize money and investment capital for positive social results.

Impact investing considers both the physical investments of firms (on the assets side of the balance sheet of firms) and their impact on the environment and society, and the financial investments of investors, debt or equity (on the liabilities/shareholders’ equity side of the balance sheet of firms) to finance the physical investments.

Impact investments can be made in both emerging and developed markets. Emerging markets are riskier compared to developed markets. An impact investor can target a desired market according to his or her strategic goals and desired returns from the investments.

Two key elements are present in impact investments:

• Intentionality: an investor’s intention should include some element of both social impact and financial return.
• Measurement: while there is more availability on metrics for financial performance, an impact investor should also aim to measure the social impacts of the investment.

All investments make an impact on society, either positive or negative. Impact investors intentionally make investments that lead to measurable positive social impacts.

Parts of Impact Investments

Impact investments come in different forms of project size and risk level. Just like any other type of investment, impact investments provide investors with a wide range of possibilities when it comes to investment expected returns. The only differentiating factor with impact investment is that it does not only provide investors with positive financial returns but also has a social or environmental impact via the physical investments of firms that it finances.

The market for impact investment may vary and investors may choose to invest their money into emerging or developed markets/economies. Impact investments cover a huge number of industries including healthcare, education, energy mainly renewable energy and agriculture.

There are mainly two parts of impact investment: the choice of criteria and the use of these criteria for investing (selection of firms in the portfolio of investors).

Environmental, Social, & Governance (ESG) Criteria

ESG criteria refers to healthy practices undertaken by an investment. It helps us to analyze potential investment that may have a prominent impact on the environment/society. ESG criteria are integrated to enhance the traditional financial analysis of an investment by identifying potential risks and opportunities beyond purely financial valuations. Even though there is a parallel social conscience, the main objective of ESG evaluation remains financial performance.

Socially Responsible Investing (SRI)

Socially responsible investing (SRI) is a step up to ESG since it actively eliminates or selects investments according to specific ethical agendas. SRI uses ESG criteria (which facilitate valuation) to apply negative or positive screens on the investments. SRI uses ESG criteria to select potential impact investments.

Benefits of Impact Investing

The following points mentioned below are some of the benefits of impact investing:

Return on investment (ROI)

An impact investor can invest a fixed amount of money in a series of socially beneficial projects or organization. The returns on the investment would vary from below-market to market rate. However, in impact investing, even a simple return of principal amount used for investing creates philanthropic leverage that is unattainable through tradition investing methods.

Alignment with goals of financial investors

Firms have traditionally been focused on achieving profit maximization. This is also known as shareholder theory where the main goal of the firm is to maximize the shareholders’ returns. With impact investing, firms can utilize more assets to be leveraged for social or environmental goals. This is also known as stakeholder theory where the goal of the firm is to maximize shareholders’ profit without harming the environment or society.

Negation of onvestor’s conflict

When investors utilize their money for impact investing, they are aware that the investments are in line with ethical values. As a result, investors do not find themselves in situations of conflict with the management regarding the utilization of money for social or environmental benefits.

Examples of impact investing

The Gates Foundation

One of the most commonly known impact investment funds is the Bill & Melinda Gates Foundation. It was launched with a total endowment of nearly $50 billion. The Foundation has a strategic investment fund with $2.5 billion under management, which is invested in ventures that align with the Foundation’s social goals.

Soros Economic Development Fund

Launched by billionaire philanthropist George Soros, the Soros Economic Development Fund is part of the Open Society Foundations. Out of the $18 billion contributed to the Open Society Foundations, the Soros Economic Development Fund uses $90 million to actively invest in impact ventures.

The Bottom Line

Socially and environmentally responsible practices tend to attract impact investors. It means that companies can gain financial benefits by committing to socially responsible practices. It is observed that impact investing is more attractive to younger generation, such as Millennials and Gen-Z, who want to give back to society.

Investors also tend to profit from impact investing. A 2020 survey by the Global Impact Investing Network (GIIN) found that more than 88% of impact investors reported that their investments were meeting or surpassing their financial expectations.

By engaging in impact investing, individuals or organizations essentially state their support to the vision and the mission of the company working towards a certain social or environmental change. As we see a shift in the investor’s perspective to be more socially conscience, and to engage in impact investing, it will most likely result in more companies to become socially conscious.

Useful resources

The Gates Foundation

The Open Society Foundation

The Global Impact Investing Network (GIIN)

Related posts on the SimTrade blog

   ▶ Akhsit GUPTA Portrait of George Soros: a famous investor

   ▶ Anant JAIN Environmental, Social & Governance (ESG) Criteria

   ▶ Anant JAIN Socially Responsible Investing

   ▶ Anant JAIN The Top 5 Impact Investing Financial Firms

About the author

The article was written in July 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).