Impact Investing Overview
The idea of impact investing has gained popularity among investors as its importance became obvious over time. But what is impact investing, and how does it simultaneously benefit investors and society as a whole? In this article, we at EWOR will help you understand impact investment and its primary goal.
Even though impact investment was not always formally recognised, it has been silently practised for some time. According to Investopedia, “Impact investing is an investment strategy that aims to generate specific beneficial social or environmental effects in addition to financial gains. Impact investments may take the form of numerous asset classes and may result in many specific outcomes.” The investors who follow this kind of investment commit themselves to social responsibility and serve the welfare of society.
Impact investment provides money to solve problems in energy, agriculture, finance, preservation of nature, and basic human needs, such as housing, health service, and education.
In a Forbes article, David Spika (president and CIO at GuideStone Capital Management) notes, “Impact investing provides a way for investors to be more proactive with their investment dollars and partner together to make purposeful investments that can affect real change across the globe.”
Some may confuse impact investing with philanthropic aspiration since both aim to provide solutions to social and environmental problems. Even though impact investing helps to solve societal problems, impact investors do want to make a profit out of their investment.
Who is Involved in Impact Investing?
Impact investments, just like any other investment, come in numerous capital and investment vehicles. Investopedia points out, “Like any other type of investment class, impact investments provide investors with a range of possibilities when it comes to returns. But the most important thing is that these investments offer both a financial return and are in line with the investor’s conscience”.
Nowadays, investor groups from both single individuals and large institutes engage themselves in impact investing. The groups are:
- Individual foundation
- Fund Managers
- Financial institutions such as Banks
- Religious institutions
- Individual investors
- Pension funds
- Insurance Companies
What Makes it Important?
From an investor’s point of view, the apparent reason is to leave a positive mark on society and the environment. Along with profit, investment can generate access to essential services, which can be healthcare, economic services, education, and so on.
Investment can create new sustainable jobs with a quality work life. An example of the effect of this investment is seen with climate change. As a massive crisis for Earth, backing a venture that aims to resist climate change allows an investor to feel that, in some way, they have also played their part in sustaining life on Earth.
What Are The Examples You Should Look At?
Forbes claims, “Impact investing covers a range of different assets and investment strategies. Essentially, any investment that is trying to meet the goal of profit plus positive social or environmental outcomes could be considered a form of impact investing.”
A few examples of impact investing include:
- Investing in manufacturers or start-ups who are developing things that may help bring sustainability to the environment.
- Backing small business owners to help them grow their business.
- Investing capital in housing organisations that offer affordable housing to low-income individuals.
- Setting up or financing monetary institutes that can grant loans with small interests.
Impact Investing Organisations
- Bill & Melinda Gates Foundation is a well-known impact investment fund with a total asset of almost $50 billion. The foundation claims, “We are a non-profit fighting poverty, disease, and inequity around the world.” They use their capital to invest in ventures that have goals of improving education, health, and gender equality.
- Craft3 is an impact investing organisation that gives business assistance and financing, for instance, providing loans to individuals and companies who need monetary assistance. However, Craft3 only contributes to those who put their efforts into engaging in environmentally and socially positive work.
For example, here is an article published on how Craft3 positively helped someone to open a childcare business through impact investing.
- The Ford Foundation. With $16 billion of assets, the Ford foundation advocates social justice and invests in a wide range of fields, including technology, the environment, and the future of workers.
Through their Mission Investments, they invest in areas that will solve some of the world’s greatest social problems through grants, program-related investments (PRI), and mission-related investments (MRI).
The foundation claims, “We aim to influence and mobilise a wide spectrum of capital providers—from institutional investors to banks to retail investors—to develop a more inclusive form of capitalism and create a more economically just world.”
- EcoEnterprises Fund, Based in Brazil, focuses on ecosystem conservation, natural resources, biodiversity, and climate risk mitigation in South America. They heavily invest in sustainable organic agriculture, aquaculture, sustainable forestry, non-timber forest products, and ecotourism. It is women-owned and managed.
- Finance in Motion. This Frankfurt-based asset management firm only focuses on sustainable development in emerging markets. It invests in firms or organisations that work on climate change, biodiversity conservation, and sustainable use of natural resources.
- DBL Partners. A key area of its investment is clean energy. However, it also finances transportation, the future of work, agriculture, and conservation. Their goal is to make a profit while stimulating economic, social, and environmental impact. Their notable investments include Tesla, Powerlight, NEXtracker, etc.
- Adobe Capital. After its foundation in 2000, this Mexico-based impact investing firm endeavours to tackle Mexico’s societal and environmental challenges. They back their investment in smaller companies that have less than $5 million in sales. Apart from monetary investments, it helps these companies with financing and technical assistance.
- CrossBoundary LLC, a Kenya-based impact investment firm, focuses on education, and renewable and clean energy. Their focused area is Africa, and much of their investment is in infrastructure projects. Their goal is to bring electricity and build education infrastructure to rural areas of sub-Saharan Africa.
Does Impact Investing Reach Its Goals?
There is an argument among people about whether impact investment successfully reaches its goal, or rather it performs well. Some believe it makes low returns, while some reports show it performs better than traditional investments. Measuring the success of impact investing in the light of conventional investing strategies can make success look complicated.
An impact investor does not only care about the monetary gains, but also the social impacts its investment may bring, and the goals differ from one investor to another. Therefore, it lacks the methods to assess the impact on social or environmental policies that it may provide. Nonetheless, impact investing does pose a risk just like all the other types of investment. However, a sustainable fund can lower risk compared to traditional investing.
Impact investing is a welcoming effort to change social problems, and more investors should embrace this type of funding to bring a better possible future to the world.