Although it seems like the latest trend, impact investing has informally existed since the dawn of financial systems. Its establishment as an investing strategy is due to a general reckoning and millennials’ interest in social and environmental impact.
Read on to find out about what impact investing is, how it works, and how impactful it really is.
What Is Impact Investing?
Impact investing is an investment made with the intention of having a positive social or environmental impact, as well as turning a profit. The simplest example would be investing in a company with a sustainable product like renewable energies, but impact investing can manifest in other ways.
You can realise an impact investment through any asset class (stocks, bonds, ETFs, venture capital), as an individual, a corporation or a fund. As the aim is to achieve a positive impact as well as making a profit, impact investors often make concessions and settle for returns lower than the market average.
Examples of Impact Investments
If this is all sounding a bit theoretical, below are some real-world examples of impact investing.
- Impact Venture Capital. Some VC funds exist to invest in particular industries working towards social or environmental change. U.S. fund Alante Capital, for example, invests in innovative technologies in the sustainable apparel sector.
- ESG investing. ESG stands for environmental, social and governance factors. An ESG investor will take these into account when considering an asset to invest in. If you’re an individual investor looking for a sustainable investment, you could consider investing in an ETF like FAN. As the First Trust Global Wind Energy ETF, it tracks companies involved in the wind energy industry.
- Activist investing. Activist investors individually or as a group buy up a significant share in a company to influence how it is run. This could be done by gaining a seat on the Board of Directors, for example. Exxon Mobil once lost two shareholders to fund Engine No 1 in a drive to force the company away from fossil fuels.
Impact Investing and Corporate Social Responsibility
As sustainability and social impact are at the front of people’s minds, more companies are reinvesting a portion of their profits into worthy causes. Euromonitor International, for example, has committed to spending 1% of its annual profits on causes chosen its staff.
This involvement in social and environmental causes is particularly important for the attraction and retention of younger employees. A 2016 Cone Communications study showed that 64% of millennials and Generation Z surveyed take a company’s social and environmental commitments into account when deciding on a place of work. The same percentage wouldn’t take a job if the company didn’t have a strong CSR programme in place.
How Effective Is Impact Investing?
The answer to that question depends on what metrics we consider.
Socially and environmentally, it can be hard to measure the impact of an investment into a cause. Unlike policy making which leads to tangible results, there are no formal frameworks or methods of measuring impact investment. In theory, you could measure the impact of an investment according to the benefits the funds given to an organisation make. Analysis could focus on the success of the product or service developed as a result of the investment, for example.
People often believe that financially, impact investing is less beneficial than other investing. This is a disputed claim. On the one hand, it is true that impact investors prioritise investments with a higher social and environmental return, meaning financial returns can take a back seat. However, a study by McKinsey analysing 48 impact investor exits over 5 years in India showed a median return of 10%. The top third of the deals analysed achieved a median return of 34%.
EWOR is an incubator for socially and environmentally impactful businesses. We champion entrepreneurs who want to make a difference. Among our alumni success stories we have Beth Kume-Holland, who created a job marketplace for disabled people. Her venture was named one of the most promising startups in the U.K. Go to our website to find out more about our resources and programmes for entrepreneurs.