Impact Investing has been gaining attention in the past few years. Many investors of various organizations are involved and it has become a major discussion among people. Not only the United States has become involved, but so have countries in Europe. If you are new to the term and wondering how it works, then allow us to educate you.
The main purpose of Impact Investing is to create a positive social and environmental impact that is measurable while also gaining a financial return. Depending on the investor’s goals, you can generate impact investments in both emerging and developed markets. You can also identify the range of returns from the market rate or below. These investments can take on many forms and may lead to certain outcomes.
The main characteristics of Impact Investing include intentionality, investment with return expectations, the range of return expectations, and impact measurements.
Intentionality refers to the investor’s plans to bring positive social or environmental impacts through investing. The investment’s return expectations are the financial return on capital or the minimum return of capital.
The range of the return expectation ranges from below the market (also called concessionary) to the risk-adjusted market rate. These can be made into asset classes which can include cash equivalent, fixed income, venture capital, and private equity.
Impact Measurement is the reporting of the social and environmental performance of the investments. This ensures transparency and accountability as they practice Impact Investing. The choices in what to measure will reflect the goals and intentions of the investor.
There are several industries that are involved in impact investing including healthcare, education, agriculture, and housing. This provides a set of diverse opportunities for investors to help tackle social and environmental issues with viable solutions while also gaining financial returns. Investors can range from banks, government investors, or family foundations.
Investments are made in things such as nonprofits that will help the community. Banks or wealth managers can provide client investment opportunities to people for any social or environmental issue. Family foundations can use assets that will help them reach their goal and maintain their overall endowment. Government investors are able to use proof of financial viability with any private-sector investor as they target their goals.
A real-life example of impact investing is LeapFrog investments working with companies to provide health and financial services to African and Asian consumers providing $535 Million. With AllLife, people with HIV/AIDS or diabetes can receive life insurance.
This will be used to help businesses expand to those with low incomes. The area that AllLife is involved in has clients who cannot find affordable insurance for their health concerns. The business also allows clients to be alerted to any health concern and take the necessary procedures. In South Africa, AllLife is the sole group that provides insurance for those who have HIV/AIDS.
Impact investing has been growing with efforts to create a high-functioning market that will promote its growth. Many investors are very optimistic about the progress of impact investing and expect it to become larger and more efficient in the future. Many believe it will become a driving force to address the many issues the world is facing right now.
Among those who have given compliments to Impact Investing, Forbes is a notable magazine that has given praise as they believe it is good for both the people, the environment, and business. There are also notable supporters for Impact Investing such as Generation Investment Management (GIM), Blackrock, and the Union Bank of Switzerland (UBS).
The aforementioned groups have shown ways of using Impact Investing. UBS has raised $471 million to help cancer research initiatives become successful. Blackrock CEO, Larry Fink, has written annual letters imploring corporations to have a sense of social responsibility.
While Impacting Investing has earned praise, it also has its own critics. An article by Vox questions if Impact Investing really is working as it should. Despite trying to invest in promising companies, Impact Investors tend to underperform the overall market. Also, identifying companies and industries which will prove successful is difficult.
The article said that there are two things necessary for Impact Investing to fully work; the first one is to identify a business that has proven to be successful and improve the world, the second thing is for the business to have a thing called “additionality.” This refers to a path for the business that will be more successful than it should have previously been. The author believes that all of this will be difficult and won’t always work. But under the right circumstances and with the right decisions, Impact Investing can still work.
To sum up, the pros of Impact Investing are that it brings awareness and takes action for many social and environmental issues across the world. It has the potential to become a major force in assisting many social and environmental issues around the world. There are several investors and organizations from various industries that are involved with Impact Investing. Those involved will gain financial returns for making these investments.
The cons of Impact Investing come from critics who question if Impact Investing is really working as it is supposed to. They have said that it has underperformed and it is difficult to gauge which programs will work. It needs improvement and people need to be mindful of the choices they make when they are involved.
In the end, Impact Investing is a new method for investors and organizations to give back and help with the many social and environmental issues in the world. While there is criticism of its effectiveness, there is no doubt that the potential for Impact Investing is there and will become a force for change in the future.
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References
Chen, J. (2020, August 28). Impact Investing Definition. Retrieved November 09, 2020, from https://www.investopedia.com/terms/i/impact-investing.asp
Dallmann, J. (2018, December 31). Impact Investing, Just A Trend Or The Best Strategy To Help Save Our World? Retrieved November 10, 2020, from https://www.forbes.com/sites/jpdallmann/2018/12/31/impact-investing-just-a-trend-or-the-best-strategy-to-help-save-our-world/?sh=5e47a93075d1
GIIN. (n.d.). AllLife. Retrieved November 10, 2020, from https://thegiin.org/research/profile/alllife
GIIN. (n.d.). What You Need to Know about Impact Investing. Retrieved November 09, 2020, from https://thegiin.org/impact-investing/need-to-know/
Piper, K. (2018, December 18). “Impact investment” funds advertise great returns and social impacts. They aren’t delivering. Retrieved November 10, 2020, from https://www.vox.com/future-perfect/2018/12/18/18136214/impact-investing-socially-responsible-sri-report
