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Social impact investing explained

Social impact investing explained

Investing

What is social impact investing and why is it attractive to both individual and corporate investors? My Business looks at the rapid rise of impact investing and its relevance to our global community.

Impact investing is an approach that purposefully and intentionally seeks positive social and environmental impacts while creating financial returns. Actively measured, the positive social and environmental impacts are sought by employing financial mechanisms.

Companies engaging in social and/or environmental impact investing are required to report and provide evidence of the creation/production of these desired impacts.

Both emerging and developed markets can be recipients of impact investment. Its growth has provided companies and organisations with the capital to address pressing issues in sectors such as agriculture, environmental conservation, clean and renewable energy, microfinance, and accessible and affordable basic services including housing, education, and healthcare.

Impact investment has attracted both individual and institutional investors, including:

  • Development finance organisations
  • Diversified financial institutions and/or banks
  • Family offices and fund managers
  • Individual investors or private investors
  • Insurance companies and pension funds
  • Non-governmental organisations (NGOs)
  • Private foundations and institutions
  • Religious institutions

Impact investing is characterised by:

  • Intentionality and purposefulness
  • Investing with an expectation of returns
  • Asset classes and a range of returns expectations
  • Active measurement of impact

Intentionality and purposefulness

What sets apart impact investing from other investment approaches is the investor’s desire to create a positive social and/or environmental impact with one’s investment. Intentional and purposeful investment addressing the issues threatening our world today is the heart of impact investing.

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Investing with an expectation of returns

Impact investing still seeks to generate financial returns on capital, or at the very least, even just a return of capital.

Asset classes and a range of returns expectations

Impact investment targets returns made across asset classes, including cash equivalents, fixed income, private equity, and venture capital, among others. These financial returns range from below-market to risk-adjusted market rates.

Active measurement of impact

The commitment of the investor to actively measure, report, and provide evidence on the positive social and/or environmental change effected and/or achieved by his or her investment(s) is the heart of impact investing. This measurement ensures transparency and accountability while building the field and furthering impact investment practices of the companies invested in.

Each investor’s approach to measurement varies.  Investors observe the following best practices:

  • Informing relevant stakeholders of the investment’s social and/or environmental objectives and its relevance
  • Determining performance matrices on objectives using standardised measurement tools whenever and wherever applicable and possible
  • Monitoring, managing, and assessing the performance of investees against objectives and targets
  • Reporting and provision of necessary evidence of performance, progress, and/or positive social and/or environmental impact to relevant stakeholders

Investors also vary in their perception and conception of the social good their investments are trying to address and/or effect on stakeholders and relevant communities.

The approach might be geographic: whether investing in developed or emerging markets or both. A thematic approach can also be used: educational reform, access to housing, better healthcare and medical services, financial inclusion and provision of financial opportunity to marginalised communities, or even the provision of new solutions and/or improvement of practices for existing organisations and businesses.

Investors’ preferences on where to place their investments can be categorised into major five points of impact:

  • Paradigms
  • Place
  • Planet
  • Process
  • Product

Paradigms

These investments seek positive change in entire systems. Investments that alleviate child malnutrition in whole countries, the transformation of cost and improvement of accessibility of point-of-care diagnostics in developing markets, and investments that provide better access to clean water in the African regions, are all examples of this category.

Place

These investments are made for companies, projects, and ventures in specific locations or benefiting a particular community or group of people.

A company, say a restaurant or a hotel, creating jobs targeted for poor neighbourhood(s), or a foundation making loans available to women and single parents in developing economies to access better living opportunities for their families, are examples of this category.

Planet

This category involves clear and actively measurable benefits to the environment at large.

Efforts in the preservation and/or restoration of critical ecosystems and natural habitats, the measurable reduction of greenhouse gas emission, or projects aimed at building sustainable sources of clean and renewable energy, are examples of this category.

Process

Investments in this category are focused on business practices. It includes equitable labour practices in supply chain systems, the fair trade of coffee and/or tea, or buy-one-give-one apparatuses providing access to goods and services, and even the simple improvement of methodologies in a company to allow for holistic growth and development among its employees.

Product

These investments are aimed at effecting positive social and/or environmental change through products and/or services.

The creation of a relevant specialised medical services company for a specific community, the necessary pharmaceutical developments addressing an epidemic or health danger, and the institution of an educational enrichment program to address learning lags in a population of students in a particular area or community, are examples of product impact investing.

Why is impact investing growing?

Impact investing has seen rapid growth in recent years both internationally and in Australia. Impact investing is attractive and relevant as it challenges traditional views that only philanthropic organisations can, addresses social and/or environmental issues while also providing leeway for private or market investments to be exclusively aimed at profitability, and creates more opportunities for financial returns.

With impact investment, business owners not only grow their business and create more opportunities for financial success but they also contribute efforts to bring positive change on the many social and/or environmental challenges the world faces.

Social impact investing explained
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