Looking for a new way to make a positive impact? Although impact investing has been around for quite some time, it’s beginning to attract more attention than ever. Individuals and entities alike are figuring out that this unique investing strategy is a pathway to influencing positive social change while also making a profit. Keep reading to find out how you, too, can make an impact by investing your dollars with intention.
What Is Impact Investing?
Impact investing is an investing strategy that promotes positive social and environmental outcomes while also providing financial gains. Impact investors place their capital with funds, organizations, and companies who have it in their mission to create measurable impacts that benefit society, the environment, or both.
The term impact investing was coined in 2007, although it has been around for much longer. Some might consider this type of investing as a form of philanthropy. Instead of donating money to an organization for their discretionary use, you’re instead investing it in a way that encourages companies to lessen business impacts on the social environment.
What Is An Impact Investing Strategy?
An impact investing strategy is a strategy through which the investor selects companies, funds, or organizations that create benefits for society, the environment, or both. For example, an investor might actively seek to support companies that are working to eliminate single-use plastics. Another investor might invest in a fund that only represents companies switching from fossil fuels to renewable energy sources.
What Is An Impact Investing Firm?
An impact investing firm is a financial company, typically an investment fund, that invests to promote positive social and environmental change. In addition, they seek to generate returns from these investments. Some firms may be more focused on generating strong returns, while making an impact may be the priority for others.
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Types Of Impact Investments
Impact investments come in all shapes and sizes. Investors can virtually select any sector or industry to invest in, all of which offer a wide range of return options. In addition to impact investing, two additional investment types fall into the ethics or conscious-based investment category: ESG investing and SRI investing.
Environmental, Social, & Governance (ESG)
ESG is a form of investing that measures an investment’s performance in three key areas: environmental, social, and corporate governance.
The Sustainability Accounting Standards Board (SASB) is responsible for developing and reporting ESG standards. In addition to overarching ESG metrics, the SASB also publishes industry and sector-specific standards.
ESG standards make it easier for socially conscious investors to screen their investment options.
Socially Responsible Investing (SRI)
Socially responsible investing (SRI) is another kind of ethical investing that focuses on including or excluding investment options based on specific criteria. These ethical guidelines can be established by an individual investor or a fund and can be based on personal values, religious beliefs, or political alignment. In other words, there is no such thing as a universal set of SRI guidelines. It’s more about making investment choices that align with personal core values.
Impact Investing Vs. Socially Responsible Investing (SRI)
Both impact investing and socially responsible investing (SRI) share the common goal of promoting social benefit. However, it’s important to know the difference between the two.
In SRI, the investor is looking to invest in companies or organizations whose values align with their own. Impact investing takes this a step further. Not only do investors want to see that an entity reflects their core values, but they also want to see that the entity is using investor funds to enact a positive, measurable impact.
For example, an SRI investor might only invest in companies that produce vegan and animal cruelty-free products. An impact investor might take this a step further by investing in a company that forwards a portion of its proceeds to local shelters.
Impact Investing Vs. ESG Investing
Although both impact and ESG investing promote socially conscious business practices, investors have different objectives.
Environmental, social, and governance investing use certain metrics to evaluate the financial performance and risk of a company. An ESG investor is focused on maximizing their returns while benefiting society or the environment.
In contrast, impact investing focuses on promoting a specific objective. For example, an investor or fund might have a goal of eliminating fossil fuels by only investing in companies that use renewable energies. Creating social good is the primary goal while obtaining financial returns is a fortunate byproduct.
Examples Of Impact Investments
To help exemplify impact investing, let’s take a look at some of the world’s biggest impact investment firms:
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Blackrock
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The Ford Foundation
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Soros Economic Development Fund
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The Gates Foundation
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Generation Investment Management
Blackrock
Blackrock is the world’s largest investment firm. It manages an asset portfolio of over $6 trillion, and its CEO Larry Fink just told companies to examine their social responsibilities. “Society is demanding that companies, both public and private, serve a social purpose,” he said in his annual letter. He pressed that companies need to make a positive contribution to society and not just deliver financial performance.
The Ford Foundation
The Ford Foundation was founded in 1936 by Edsel and Henry Ford, as in the Ford Motor Company. This privately managed fund has grown to $14 billion today. According to its website, the Ford Foundation seeks to fight social inequality. They do so by providing 1,500 annual grants to organizations that align with these values. The Ford Foundation also sponsors fellowships to help develop future leaders.
Soros Economic Development Fund
Billionaire and philanthropist George Soros launched the Soros Economic Development Fund, which is a part of Open Society Foundations. $90 million of the $18 billion fund is invested toward impact projects. The Open Society Foundations seek to build “inclusive and vibrant democracies” by promoting higher education, journalism, justice reform, and economic equity.
The Gates Foundation
Chances are, you’ve already heard of the Bill & Melinda Gates Foundation. Bill Gates is the famous co-founder of Microsoft, and he’s made it his mission to make the world a better place. The Foundation endowment is roughly $50 million, which mostly goes to philanthropy. It also has a lesser-known strategic investment fund with $2.5 billion in assets. The fund invests in projects and organizations that promote global health and development, as well as higher education in the U.S..
Generation Investment Management
In 2006, former U.S. Vice President Al Gore released the documentary, An Inconvenient Truth. The movie highlighted the alarming environmental challenges we face. Alongside the documentary, Mr. Gore founded Generation Investment Management. The $36 billion equity fund places a heavy emphasis on “sustainable investment options” while delivering “superior investment performance.”
How Do Impact Investments Perform?
One might think that a company with a double bottom line — positive impact and profits — would have lower returns than other companies. Contrary to this common misperception, data shows that impact investments perform just as well as any other type of investment. In some cases, an impact fund might even outperform its specific market.
Academic studies have found a positive relationship between impact investing and financial performance. One contributing factor may be consumer choice. Consumers are increasingly choosing to spend their dollars to elevate companies that are better for society and the environment.
Summary
Although impact investment funds have been around for a long time, an increasing number of individual investors are starting to turn to impact investing. The increasing popularity of impact investing shows that consumers and investors alike are being more intentional about creating social good instead of merely avoiding negative impacts.
Some are frustrated by the public sector’s inability to address climate change and social injustice effectively. Others want to hold companies accountable for the impacts they have on society and the environment. Data shows that investing in social good can be profitable. Regardless of their reasons, investors are benefiting from a win-win situation.
Were you aware of the difference between socially responsible investing and impact investing? Did you know that you could make a positive impact on the environment and society while earning returns? Let us know your thoughts below!
Sources
https://thegiin.org/impact-investing/need-to-know/
https://thegiin.org/research/publication/impinv-survey-2020#charts
https://www.fordfoundation.org/work/our-grants/how-we-make-grants/
https://www.generationim.com/
https://www.forbes.com/companies/blackrock/
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