Updated: Dec 14, 2021
With the planet going towards a green economy,an economy that aims at reducing environmental risks and ecological scarcities, the sole purpose that companies have to accomplish cannot be just mere profits. They have the responsibility to prioritize the environmental impact that their production, distribution, or investment decisions have. This is the main reason why impact investing is raising more and more awareness in the business world, especially among younger investors.
What is impact investing?
Impact investing is an investment strategy that aims to generate specific, beneficial, social, or environmental effects in addition to financial gains. Impact investing basically directs capital to enterprises that generate social or environmental benefits. The point behind it is to use money and investment capital for positive social results. We can think of it as a middle ground between traditional investing and charitable giving where you can match your investment needs with your beliefs.
The type of impact that can evolve from impact investing varies basd on the industry and the specific company within that industry, but some common examples include giving back to the community by helping the less fortunate or investing insustainable energy practices to help save our planet.
How does it work?
Let us suppose that a certain issue tugs at your heartstrings, providing access to technology to low-income neighborhoods for instance, and you want to invest incompanies dedicated to that cause. Initially, you want to find an impact investment fund made up for companies that provide access to technology for people in those communities. Then, you will invest money into those projects and companies that are specialized in that particular cause. Pretty straightforward. Areas impact investors are interested in are several, below are listed some of the most recurrent:
Toxic emission and waste
Clean drinking water
Health and safety of employees
Needless to say that now there are hundreds of different impact investing funds to choose from in both emerging markets and developed economies. It is up to the investors deciding where to put their money into.
Impact Investing Value
Today, socially responsible investing, which includes impact investing in its applications, is roughly worth $12 trillion. Whereas impact investing alone was worth more than $300billion in 2020.
The type of socially conscious investing has attracted investors of all shapes and sizes: from individuals and small businesses to nonprofit organizations and religious institutions. What is the main driver that pushes this kind of investors? Investors who follow impact investing tend to consider a company’s commitment to corporate and social responsibility or the duty to positively serve society as a whole.
The bulk of impact investing is commonly done by institutional investors, including hedge funds, private foundations, banks, pension funds, and other fund managers.
However, a range of socially conscious financial service companies, web-based investment platforms, and investor networks now offer individuals an opportunity to participate, too. For example, one major venue is microfinance loans, which provide small-business owners in emerging nations with startup or expansion capital.
Do impact funds work?
The fact that these impact funds cannot be scaled adequately to create attractive returns, carry higher risks overall, and are less liquid therefore harder to exit are all misconceptions that need to be rectified. Some impact investment funds intentionally invest knowing they will obtain lower returns. That happens because they are more concerned with accomplishing their social or environmental goals than returning a profit. Some impact investments try to bring in returns thatb are competitive with the stock market. Other impact funds instead, can even outperform the market. Generally speaking, the returns from impact investing tend to be slightly lower than the market average. In a study conducted by the University of California, the median impact fund had a median internal rate of return (MIRR) of 6.4%; compared to 7.4% from non-impact seeking funds. Still, according to a research conducted by the Global Impact Investing Network (GIIN), impact investments have average returns of 5.8% that is well below the average return of the S&P 500, which is approximately 10%.
Examples of Impact Investing
The Gates Foundation
One of the most well-known impact investment funds is the Bill & Melinda Gates Foundation, launched by the celebrated Windows founder and his wife with a total endowment of nearly $50 billion. While most of the Gates Foundation is engaged in philanthropy, it also has a strategic investment fund with $2.5 billion under management, which is invested in ventures that align with the Foundation’s goals of improving health, education, and gender equality. As explained on the fund’s website, the strategic investment fund supports “organizations or projects that benefit the world’s poorest and are often overlooked by traditional investors."
Soros Economic Development Fund
The Soros Economic Development Fund (SEDP) is part of the Open Society Foundations, launched by the Hungarian-born American billionaire and philanthropist George Soros. Soros has contributed about $18 billion to the Open Society Foundations, $90 million of which is actively invested in impact ventures. As the name implies, the Foundation seeks to support “open societies” by promoting democracy, legal reforms, higher education, and journalism, as well as other fields such as race and gender equity.
The Ford Foundation
The Ford Foundation was launched in 1936 by Edsel and Henry Ford, with an initial endowment of $25,000. Today, it has one of the world’s largest private endowments, with $14 billion under management. Most of that money is given as grants to support causes aligned with the values of the foundation; however, in 2017 the Ford Foundation announced plans to invest $1 billion in business ventures aligned with their mission.