Impact Investments are investments made into companies, organisations, and funds with the intention to generate a measurable social and environmental impact alongside a financial return (GIIN).
We used to hear from entrepreneurs and leadership teams some no-nonsense sounding statements to mean that they were not running the business for charity. Though, maybe, from a different perspective, this has been the mindset of the majority of entrepreneurs world over till recently. Of course, there were exceptions in the olden days too.
This perception about the goals of doing business has been transforming of late. People including entrepreneurs have started realising that they have to give back to society and contribute towards making the world livable for future generations. In other words, the desire to do their bit in making the earth a sustainable place for all living beings has been becoming the instinct of entrepreneurs. Sustainable growth is no more a charity but a must-morally, ethically, and regulatorily.
People, particularly the new generation, want their efforts to make an impact on society and not just maximise their wealth. Politics is one way to make such changes in the world but that is not easily accessible to all the people. The concept of impact investment might have evolved as a vehicle to facilitate non-political people (meaning people who are not actively pursuing a political life) to participate in opportunities that impact beneficial social and environmental changes. Keeping in line with the thought to develop sustainably, the newer generation of entrepreneurs have come up with investment ideas that are environmentally-friendly.
According to GIIN, impact investments are “investments made to generate positive, measurable social and environmental impact alongside a financial return.” and that “impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals.”
Impact investment is, therefore, not a pure philanthropic or charity investment. It is a hybrid form of investment that seeks a financial return on investment and is equally beneficial to social and environmental environments. The major difference between impact investment with the normal investment is that the expectation of financial return can be equal to or even less than the market return rate.
Impact investment is differentiated from other forms of investment mainly by the following guiding principles:
1. Financial return: impact investment is not done without expecting financial returns. The impact investors expect to earn a financial return on their investment, below or even above the prevailing market rate.
2. Social or environmental challenges: but the financial return is not the only motto of impact investment. The impact investors aim to achieve a beneficial impact on society and/or the environment.
3. Measuring and reporting social and environmental impact: there are established mechanisms and metrics to measure the financial return. However, the impact investors want to measure the social and environmental performance using standardised metrics.
There are other forms or terms like social responsibility investment (SRI), economic, social, governance (ESG) investment used interchangeably to mean impact investment. Not that it is fully wrong. However, there are some finer differences among them.
Socially responsible investing is about choosing investments based on specific ethical guidelines. It is understood to be a method to eliminate investment in negative list organisations based on ethical, moral, religious beliefs of the investor. For example, some investors don’t want to be part of cigarette and/or liquor-producing companies.
ESG as the term manifests involves investments in companies that pursue environmental, social, and governance objectives along with financial returns. Impact investment typically combines the characteristics of SRI and ESG.
Touching upon corporate social responsibility (CSR) is pertinent here. CSR is a statutory provision in most countries including India. Companies above certain thresholds have to mandatorily earmark a certain percentage of their profits towards CSR initiatives. Though investments in CSR-compliant companies is not a deliberate impact investment route it is in effect that, though indirectly. One differentiator that impactS investors should look at is the way CSR money is spent - whether spent just for the sake of compliance or to impact changes.
It is important to mention here the sustainable development goals (SDG), the 2030 Agenda for Sustainable Development, adopted by all United Nations Member States in 2015. The essence of SDG is the 17 Sustainable Development Goals (SDGs), meant for both the developed and developing countries. Though SDG is set for federal and county/state governments, the organisations at the micro-level have a role to contribute towards the governments achieving these goals in a rolling-up manner. Impact investment can, therefore, be said to be indirectly part of SDG.
Almost all categories of investors, both individual and institutional, have been attracted to impact investment because of the changes in the perception of investment. The list of investor categories, though not exhaustive, includes the following:
More and more people are coming out intending to contribute towards making positive changes in society. As we discussed earlier, it is not possible for all to be part of politics to accomplish their goals. Whether politics is the genuine vehicle to make a positive impact on society is not the scope of this article.
That said, individuals, particularly millennials, want to invest their large disposable income to generate financial returns and as well contribute to improvement in society by way of preserving and conserving the environment, providing microfinance, education, shelter, etc. to the underprivileged sections of the society, and transparent corporate governance.
The individuals can achieve their goals by investing directly in the shares of selected companies or ESG mutual funds and other investment funds. It is not only individual or institutional investors who are keen on impact investments but enterprises too. Enterprises and large NGOs invest in startups with similar objectives of impact investments.
However, the challenge of measuring and reporting the impact benefits still needs improvements. Measurement and reporting of impact investment need more refined tools to capture data, analyse and report it to the stakeholders as the ultimate objective of impact investment is changing the world for the better.