In the last few years, the practice of impact investing has grown exponentially. Along with concepts such as social enterprise and triple bottom line, impact investment is the result of a move away from the ‘profit-only’ manner of doing business towards the incorporation of more sustainable and ethical practices while simultaneously making profit.
As the name indicates, impact investments are simply investments made primarily for positive impacts in either the society or the environment, and sometimes both. Your investment decisions, whether you know it or not, always have impacts and consequences. They could make you rich, create new jobs or find a cure for a disease; but they could also cause environmental pollution, human slavery or result in the closure of a company you’ve never even heard about.
The crux of impact investment then is to embark on investments that have positive impacts as a means of bettering our communal existence alongside our environment. According to the Global Impact Investing Network, impact investments are “investments made into companies, organizations, and funds with the intention of generating positive social and environmental impact alongside a financial return.”
As an individual, making this investment choice almost always means facing more challenges than an ordinary person seeking financial returns only. Impact investing demands more consideration, determination and homework than typical investing where the primary goal is making money. There exists a myriad of organisations that can guide you in your impact investing journey, though it’s essential to have a clear picture of what you hope to achieve from the get go. The key is to reflect on what kind of impact you want to make and where in the impact spectrum you want to place your funds. In other words, in return for your financial input, do you want in return, only money, some money, more money and impact or only impact?
To help investors understand the range of investment approaches that exist, impact investment firms provide details on the nature of returns that can be expected from an investment. Sonen Capital developed its Impact Investing Spectrum showing where traditional financial investments fall (where we seek financial returns only and no positive impact) all the way to philanthropy which the company translates as investments made purely for positive impacts and expecting zero financial returns. Somewhere in between is the approach taken by most investors.
Once you have decided on your goals and the investment approach you wish to take, the next step is to decide the area to place the funds. Like most matters that are ethical in nature, this is a personal decision. You may choose to invest in agriculture, water provisions or good old medical research.
There are two approaches that you may take here; you could either invest directly in a social enterprise or invest in funds that manage your impact investment portfolios. The latter could be the case where you have a little more money and wish to spread your investment across a number of portfolios or sectors. While your financial advisor will offer guidance, a good place to start is the Best for the World Funds list curated by B the Change. Not only does it list vetted funds which rate highly in their track record of impact and financial returns, but it rates their transparency in that process as well. B the Change is in fact a collaboration of B Lab, a community of Certified B Corps “using business as a force for good”.
Now, the million-dollar-question is, can we really effect change through impact investing? Investors and impact investment funds seem to think so. Based on its 2018 survey, Global Impact Investors Network (GIIN) estimates there is $228 billion in impact investing assets, roughly double that of the previous year. According to JP Morgan, impact investments “offers the potential over the next 10 years for invested capital of $400 billion–$1 trillion and profit of $183– $667 billion”. Industry reports such as the Pengana WHEB Sustainable Investing Impact ‘Prosperity with Purpose’ Report, which quantifies impact investments, shows that positive impact is being achieved.
Like all other positive concepts however, impact investing is prone to abuse. There are funds that parade as impactful but only in name and can be likened to someone placing a band-aid over a festering injury he/she caused in the first place. The key here is to find funds that have impact investing as their core value and not just something tacked on to gain new market share. That said, I believe that impact investing is the right way to go for the simple reason that it works better than the alternative. Profit-crazy companies are now presented with a compromise which many will take so as to remain relevant in the new sustainability-minded economic landscape.
The phrase ‘put your money where your mouth is’ is an embodiment of the belief that words and thoughts can only go so far. If you truly believe in a cause, then you should commit your funds (resources) to it because money accomplishes good things much faster.
This is the ethos of impact investing and I think it cannot be overemphasized. We need to continually embark on more humane investments to better our lives and protect the environment; our communal heritage.
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