Impact investing gives investors the opportunity to make some money while contributing to the greater good
There are a lot of ways people try to make a positive difference in the world, from recycling bottles and cans to donating to worthwhile charities, and beyond. A recent trend in the financial world known as impact investing offers people a way to make some substantial profits while also making a difference.
More than simple philanthropy, impact investing occurs when investors evaluate a company’s corporate social responsibility before purchasing shares. Individual investors, fund managers, financial institutions, and more have begun investing not only in hopes of making money, but also in accordance with their values and in an effort to support positive societal or environmental change. With scores of younger Americans choosing to spend their money on products from companies they believe are responsible, impact investing seems to be the next logical step.
Why Impact Investing?
As impact investing continues to grow, it’s important to know specifically what draws investors to the practice. Such an understanding helps global investment firms bring in more investors and money to effect greater change.
The Global Impact Investing Network (GIIN) published a 2018 survey of impact investors and impact investing firms that provides insight into the world of impact investing. It shows that impact investors are most concerned with fighting poverty, climate change, and gender inequality, and promoting universal access to healthcare and quality education.
At the same time, firms specializing in impact investing — such as Pegasus Capital Advisors and Partners Group — need to measure and report the amount of social or environmental change they are assisting. GIIN has catalogued performance metrics in its IRIS program, allowing impact investors to evaluate much-needed data that shows where their investments are making the most difference and channeling investments in that direction.
Is It Profitable?
Sure, supporting a good cause is great, but that’s what charity is for; when it comes to investing, people are looking to turn a profit. According to the previously mentioned GIIN study, more than 90 percent of the surveyed impact investors met or surpassed profit expectations in 2018.
Global impact investing club Toniic discovered similar success when surveying its members. According to their study, 82 percent of Toniic members found that their investment portfolios’ gains met or exceeded their expectations. This, along with the overall rise in impact investing, helped Toniic increase its total value of impact investments by $2.8 billion from 2016 to 2018.
However, not all firms that make impact investments do so with profits at the front of their minds, so there can be some risk for those looking to make big profits in the market. Some firms see themselves as ways of funding enterprises that are otherwise solely dependent upon grants and charities. In these cases, the firms often spread out their investment portfolio across a variety of assets to cover their risk/return expectations, many of which are intentionally set below market expectations. Those looking to see big returns on their investment will want to either take a close look at the impact investment firms they are considering or look into other ETFs (exchange-traded funds).
Supporting Fund Managers
Despite the fact that major investment managers at Goldman Sachs, Bain Capital, and other firms have added impact investing products to their portfolios, the idea still has plenty of room to grow. Once some of the growing pains have been addressed, impact investing will be ready to go mainstream and have a greater effect in its targeted areas.
One of the biggest issues is transparency. Even as more firms are offering impact investing, investors are finding it difficult to obtain enough information to adequately compare the products when deciding which firm to invest with. Fund managers need to be clear about expectations, both in terms of financial return and societal or environmental goals they hope to accomplish. The creation of more impact investing funds that target specific industries and/or issues could also assist in this area.
Additionally, fund managers need more professional support. As it’s a relatively new form of investing, financial institutions often lack the information to establish best practices or train new impact fund managers. The U.S. Impact Investing Alliance is dedicated to helping grow the impact investing movement by raising awareness and serving as a resource for impact investors where information can be shared and a supportive community can develop.
Concerns of Investors
GIIN’s Annual Impact Investors Survey from 2018 showed that investors are looking for more opportunities to invest in early-stage companies; doing so allows them to help companies that need initial capital as well as reap greater financial rewards if the companies become successful.
Similarly, investors are concerned about having an exit strategy with their investments. With any investment, timing is key when selling a stake in a company. In impact investing, it’s even more vital because investors are concerned with getting their dividends as well as being sure that the company will continue to be successful. Some investment firms such as Calvert Impact Capital offer annual and quarterly reports that keep investors informed on both financial and social returns.
Impact investors also desire more government support. When federal money is flowing into companies, it bolsters their chances for success and offers a better chance of financial returns. The Chinese government’s focus on sustainability has led many impact investors — and international investing firms such as Dao Ventures — to find companies in China for investing. A Bloomberg article explains that there was more than $100 billion invested in Chinese clean energy companies in 2018, adding, “Impact investors, who mostly focus on early-stage venture capital or loans, have potential opportunities not just in sustainable food and clean energy but also in transportation, recycling, health care, senior care, and education in China.”
A Better Future
Recently, more and more people have been choosing to spend their money at businesses that are committed to environmentalism or have morals in line with their own. Impact investing is the next logical step in financially supporting companies that one deems worthwhile.
Once a few kinks are worked out and more people become aware of impact investing, playing the stock market and philanthropy could be fully intertwined as investors improve the world and their wallets.
