When most people hear the term “impact investing”, they often don’t know what you’re talking about. They might know that it involves investing in socially and environmentally conscious businesses, but may not be aware that impact investors make money, and are looking for a financial return. Along with social impact, impact investors are looking for financially sustainable companies that can pay back a loan or are profitable enough for them to make an exit in the future.
This is a new type of investing, and it’s revolutionizing the way people think about where they put their money. Now, suddenly, you can have financial returns and social returns, not just one or the other.
Why Making a Profit is Essential
Most impact investors are not primarily motivated by money (although impact investing does provide a financial return, you can usually get larger returns elsewhere), but it is incredibly important that they do look for financially sustainable organizations. Impact investors are not the same as charitable organizations and they aren’t looking to invest in charities either; they need a return, and most charities are unable to pay back financing with interest.
Impact investors are looking for sustainable, innovative companies who are growing while also impacting the world around them.
Why Charity is Still Necessary
Charities are needed in the world; they provide essential healthcare and support to the world’s most vulnerable. However, if you give someone $100 worth of clothes or food, then that’s all they have: $100 worth of something. Then once it’s gone, it’s gone forever, and they’re back to relying on another charitable donation.
In contrast, invest $100 dollars in an organization who is employing the long-term unemployed to make clothing made from recycled material and your impact extends far beyond that $100. Once you start making a profit, money can be recycled, both by the organizations and the fund managers.
Profit is Sustainable and Attractive for Everyone
More importantly, making a profit is attractive for everyone. Charities traditionally spend a lot of effort and time fundraising, convincing people that they are a worthy cause to donate to. If impact investors are able provide returns to their own investors, other people looking to make a profit are more likely to get involved. Harnessing the power of capitalism for good, impact investing makes a lot of sense.
Is Sustainable Capitalism possible?
Sustainable capitalism has been described as a “conceptual form of capitalism based upon sustainable practices that seek to preserve humanity and the planet, while reducing externalities and bearing a resemblance of capitalist economic policy”.
The idea is that political, economic and social structures integrate environmental, social and governmental aspects into risk assessments when making decisions. In investing, this is known as an “ESG (Environmental, Social, Governmental) screen”, and most major banks and financial institutions are incorporating this screen. Several organizations have shown that organizations that pass the ESG screen, meaning they are more socially or environmentally conscious and have good governance structures, are better long-term investments.
Impact Investing Goes Further
Impact investing goes one step further than ESG investing. With most investors agreeing that organizations must be intentionally creating a positive social or environmental impact to be investable, rather than just passing an ESG screen.
This idea, that you can continue to grow a business, a country, or an economy, while still having a positive impact on society, is not new. It is however, becoming more popular as businesses recognize that consumers care about the environment and wellbeing of others now more than ever. Moreover, investors recognize that companies who are having a positive impact are likely to be successful businesses in the long run.
More Evidence Is Needed
Harnessing capitalism, turning it on its head, and providing profitable returns to investors and social returns to society must be the way forward. Our planet cannot cope with the environmental and social costs that come with ignoring the needs of our environment and vulnerable populations.
For this to happen though, we need more evidence that impact investing can deliver over the long-term. More and more evidence is emerging in the form of successful, sustainable companies that are doing good while making great money.
I imagine there will be a time when impact investing is not a choice, but that all forms of investing consider society and the environment, and that time cannot come soon enough.