IMPACT INVESTMENTS

Posted on | by Wishes and Blessings

We’re launching a series on something new and exciting- impact investing! Impact investments have the potential to aid NGO’s overcome gaps when it comes to funding and is an amalgamation of philanthropy, responsible investing and financial security. Each week, we will share a new piece on this arena and help you understand the intricacies of impact investments.

What are Impact Investments?

According to the Global Impact Investing Network (GIIN)(1), Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact Investment combines both the rigorous analytics of traditional investment and the heart of philanthropy.(2)

Impact investments seek to create social or environmental benefits, directing capital to enterprises that accomplish impact goals, which traditional business models cannot. While investors looking to effect social change through the power of markets have long used strategies based on socially responsible investing (SRI) and environmental and social governance (ESG), impact investing represents a quantum shift. In impact investment, social and environmental considerations are not lenses for rejection of opportunities; they are front and centre in the decision-making criteria for investors(3)

The Global Steering Group for Impact Investment (GSG), predicts that the 20th-century approach to investing, based on risk and return, will be replaced by a new model built on risk, return, and impact(3)

The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education(1)

Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns(1)

The impact investing market offers diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns(1)

Characteristics of Impact Investing

On April 3, 2019, the GIIN published the Core Characteristics of Impact Investing(1), which complement the definition and aim to provide even further clarity about how to approach impact investing. These four tenets establish baseline expectations for impact investing:

  • Intentionality: An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing.
  • Investment with Return Expectations: Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.
  • Range of Return Expectations and Asset Classes: Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.
  • Impact Measurement: A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.

Why does Impact Investing matter?

For generations, well-intentioned people have donated to charity expecting nothing in return, but only that their financial contributions help people, society, or the environment. However, in a world that has within its disposal the ability to ensure no one goes hungry and the ability to eradicate poverty and cure diseases that have survived for generations, donors are not satisfied with giving away their funds and not seeing any financial returns or broader impact; which means that intractable social problems remain and go unsolved(4)

By directing money to companies and funds that will generate products and services that lead to a better world, and run their organizations ethically, impact investors make a big difference. When impact investment dollars pour into a stock or a fund, the companies that receive the money can use the money to benefit their customers, their employees, and their communities (5)

Impact investments could also mean making the world a safer, cleaner and more humane place – simply by investing in a company that provides malaria vaccines to people in developing countries or by pouring money into a company that makes solar panels or wind farms, thus reducing pollution and saving on energy(5)

What is the current state of the Impact Investing market?

While some investors have been making impact investments for decades, recently there has emerged a new collaborative international effort to accelerate the development of a high- functioning market that supports impact investing. While this market is still relatively new, investors are optimistic overall about its development and expect increased scale and efficiency in the future(1)

In 2019 for the first time, the GIIN developed a rigorous methodology to estimate the total size of the market. On June 11, 2020, the GIIN published the 2020 Annual Impact Investor Survey, which estimates the current market size at USD 715 billion(6) This analysis examines the supply of capital allocated to impact investing as of the end of 2019, using impact investing AUM as the indicator of market size. The GIIN estimates that over 1,720 organizations manage USD 715 billion in impact investing AUM as of the end of 2019.

Does capital need as much patience as thought of?

The 2018 McKinsey report titled ‘A closer look at Impact Investing’(7) states that both the mean and the median holding periods when investors exit have been about five years, no different than the holding periods for conventional PE and venture capital (VC) firms. Deals yielded a wide range of returns no matter the holding period. Viewed another way, this also implies that social enterprises with strong business models do not need long holding periods to generate value for shareholders.

Is the social impact significant?

Impact investments touched the lives of 60 to 80 million people in India. That is equivalent to the population of France, a figure that is much greater than the proverbial drop in the ocean many imagine impact investment to be—more like a small sea. To be sure, India has vast populations of people in need. But then again, as social enterprises scale, so will their impact, reaching a critical number of at-risk people in smaller populations(7)

 Who is focusing on Impact Investing?

Impact investing appeals largely to younger generations, such as millennials, who want to give back to society, so this trend is likely to expand as these investors gain more influence in the market. By engaging in impact investing, individuals or entities essentially state that they support the message and the mission of the company in which they’re investing, and they have a stake in the company’s welfare. As more people realize the social and financial benefits of impact investing, more companies will engage in social responsibility(8)

Impact Investing vs. Socially Responsible Investing

Impact investing is a subset of socially responsible investing (SRI). SRI is also referred to as sustainable or socially conscious investing. In some spheres, this kind of strategy is also called green investing. While the definition of socially responsible investing encompasses avoidance of harm, impact investing actively seeks to make a positive impact via its investments(8)

Investors who practice socially responsible investing tend to believe in and choose companies that subscribe to their views with respect to human rights, environmental protection, and a sense of responsibility to consumers. For example, some investors may choose not to invest in companies that manufacture, distribute, or promote cigarettes because of their overall negative effect on people’s health. Many asset management companies, banks, and other investment houses now offer funds specifically tailored to socially responsible investors(8)

References

About the Author

Manik Bahl is a CFA® charterholder. He has 5+ years of work experience in the financial services industry. He is passionate about finance and has always wanted to help the society, thus he left his career in Investment Banking to pursue social work. He aspires to leverage these learnings to enter the Impact Investing sector. While at leisure, he could be seen spending time with his family, listening inquisitively to the stories his grandparents share.