Impact investing is one of the facets of the socially-responsible investing spectrum, where investors are intentional about the investments they choose and the impact their companies have on its environment.
Sustainable investing is built on the simple idea that if you are going to invest your money, you want to invest it in companies whose business objectives are aligned with yours.
Impact investing is great for investors because they not only get to earn a financial return but also create a positive impact to the world. The impact could be promoting social causes like job creation, closing gender inequality gaps or simply making the world greener, friendlier and more habitable for the future generations to come.
Unfortunately, there is conventional wisdom that businesses cannot maximize its shareholders’ value if they are overtly concerned about environmental impacts. The result is many investors mistakenly thought that any environmental consideration would hurt their financial returns.
That may have some truths to it. However, as society advances and consumers are getting more concerned about the environmental and social footprints, companies which pay little attention are unlikely to gain long term consumer affinity. Hence, what may seem like a good financial proposition to neglect environmental impact, may afterall be a bad business decision.
According to GIIN, 2020 Annual Impact Investor Survey more than 20% of investors outperformed their expected financial returns, and 68% of investors met their expected financial returns. And only 12% of investors underperformed their expected financial returns.
That goes to show that investing for social or environmental causes do not have to be a financial trade-off and it can be a reliable investment strategy.
How Big Is Impact Investing?
There is no question that the interest on impact investing is growing. For instance, there is over $200 Trillion of invested assets around the globe. By 2020, global socially responsible investments grew by over 34 percent to more than $30.7 trillion over the past two years.
Sustainable funds, which invest based on environmental, social or governance themes, pulled in $20.6 billion in new money in 2019 alone. That’s almost four times the amount in 2018, which held the previous record. There are several reasons for the trend, including lower costs, more availability and increased investor interest.
According to Dr Wealth, a financial education company based in Singapore, “nothing can be more satisfying than seeing your investment do good for the environment and community.”
1. Sustainable Long-Term Business Model
I have learnt that some of the most important long term opportunities come from the intersection between strong business performance and sustainability especially since the rest of the market isn’t paying a lot of attention to the confluence of both factors.
For instance, a business that helps the customers to grow their revenue and cut costs, which are two compelling customer value propositions, can create an environmental business advantage through building goodwill from the local community and in turn drives business performance and environmental causes.
Companies shouldn’t just focus on profit margins. A company must find a way to balance its pursuit of profits with the greater good of its investors. Sustainability isn’t and shouldn’t be an obstacle to making money.
Some of the great companies are making impact investments today, for their own long term sustainability, in their own economic self interest, so that they can compete for customer loyalty and dollars tomorrow.
2. Sync Personal Values with Investments
Impact investments help you to sync your personal values with your money. One framework you can use to measure impact are the ESG, which stands for Environment, Social and Governance. The ESG factors tell you who and what is affected by your investments at any given time.
Sustainable companies that focus on impact investments do not just want to strive to create competitive business models. They strive to promote a social good today. As impact investors, you should use the ESG criteria to favour companies to which you choose to invest your money.
There are several examples of impact in your local community like microfinance loans, job creation processes, agricultural conservancy programs, community and home creation programs, rural energy creation, lower food cost projects, and so on. It is important to note that with impact investments, benefits flow to and through the investors as more and more value is created.
3. Social Capital Actualization
Impact investing helps you foster a feeling of connection and participation in communities around you. Impact investors are a part of social capital actualization since they help to foster micro social acts of communion organized to meet the needs of the collective.
The feeling of connection and participation in communities can be achieved through so many different ways. One of the ways to achieve this is to keep your money local by spending it in your own town.
Other ways to actively participate as an impact investor include to either put your money in your local bank account or credit union, as it will help the local bank generate revenue to develop the local environment, or simply ask around in your community for foundations that have impact investment programs since they provide an enduring source of permanent capital for a place. You can also ask your advisor about socially responsible or sustainable investing options, if you have an IRA account.