Impact Investing refers to investments that are made with the investor’s definite goal of creating an encouraging social or environmental advantage in addition to return on investment. A key example of impact investing is an investor who invests in renewable energy companies because he believes that this kind of investment will positively impact the environment and the society.
Impact investments can be done in practically any asset class, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), venture capital, and private equity. Impact investing is practiced by many individuals who are wealthy along with the institutional investors like pension funds, and non-profit organizations.
Impact investing is often used in synonym with socially responsible investing (SRI). But, some investors distinguish between the two, viewing SRI as being merely aimed at investing in enterprises committed to avoiding negative social or environmental impacts. In contrast, impact investing goes a step further by seeking positive effects.
As the investors are interested in positive social or environmental effects, they are at times ready to accept returns on investments that are below the market average. In such circumstances, their investment returns are every now and then referred to as “concessionary returns.”
Businesses caught up in impact investing distribute assets towards goods and services that bring a positive social impact. Impact investing can create a major value for investors and society as a whole.
Key Attributes of Impact Investing
| Aims to Have a Positive Environmental or Social Impact | Impact investing uses investments to lend a hand in addressing social and environmental issues such as climate change, hunger, poverty, homelessness, and the HIV/AIDS epidemic. |
| Delivers a Financial Return on Capital | Impact investing is leading a business activity and, so, expected to yield a financial return on capital or, at least a return of capital. |
| Spans a Broad Range of Sectors and Regions | Impact investing is inclusive across asset classes, from cash equivalents and microfinance, to private equity and clean technology. |
| Measures Social/Environmental Impact Regularly | The impact investor regularly assesses and reports the social and environmental performance of existing investments to ensure transparency and accountability, and inform potential investors. |
The Emergence of Impact Investing
While impact investing has been easily practiced for decades, it has only been acknowledged as an investment strategy since the turn of the century. It has increased in recognition as members of the millennial generation have become active investors because the millennial generation tend to have elevated levels of interest in pursuing positive social and environmental change. For example, Ratan Tata is known for his impact investments for positive social and environmental changes in society.
Impact investments cover a tremendously broad range of investment alternatives. Impact investors commit investment capital to companies in both developed and emerging market nations. Their investments can consist of money aimed at supporting sustainable agriculture, renewable energy, and microfinance or eco products. Impact investors also support companies in emerging market economies that provide fundamental services, such as housing, healthcare, mental health support, or awareness on social issues. For example, an investment in hospital development or women abuse fighting NGOs.
The rise of impact investing has resulted in so many companies’ actively developing and pursuing practices of corporate social responsibility (CSR). Such practices include striving to reduce a company’s environmental impact and companies practicing expanded philanthropic efforts to benefit the communities in which they operate. For Example, reliance opened a campaign of free education for the poor and developed schools for the same.
Why Venture into Impact Investing?
The old wisdom suggests that charitable donations and state subsidies are the only solutions to environmental and social problems in society. The primary objective of a business is to make profit and this goal may come into conflict with social objectives like environmental conservation and responsibly-sourced consumer goods. Impact investing breaks the chains of these beliefs by offering opportunities to invest in, and profit from, the social and environmental solutions.
For Example
Beam Money Private Limited (Beam) is a company in India that secured private equity startup capital to fund its business enterprise that serves the “unbanked” segment of the Indian population. The company’s payment services enable people to utilize electronic payment systems even without having a traditional bank account.
Synthesis
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