Defining Impact Investing: Sidestepping Semantics

Hummayun Javed
Oct 3, 2018 · 4 min read

A standard prologue for anyone being introduced to impact investing as a concept is:

There is no universally accepted definition and there are many different terms that mean something similar but are still different: sustainable investing, responsible investing, socially responsible investing, ESG investing, and so on.

What typically follows is a history of impact investing through a chronology of its precedent or concurrent terminology:

That it has been practiced for hundreds of years and previously referred to as “responsible investing” serves to root impact investing as a long-established practice (in one form or the other) so that you are not startled by its nascency.

That there are many terms, and each could be more or less impactful than the others serves to show the depth of knowledge of the practitioner as they offer their guidance to navigate the complex alphabet soup.

That some definitions are indeed widely accepted and have their origins in industry organizations with broad membership or widely respected global entities brings back some order to the conversation and a path to engage.

What could it be instead?

What should really be an introduction to impact investing is not the history of the semantics but the essence of the movement:

Impact investing is a movement of investors who are basing their investment decisions on more than the traditional financial metrics. In deciding whether to invest or how much to invest, they are looking at how companies affect the environment, treat their employees, source their materials and govern themselves— and hold them to standards that exceed the legal minimum ones.

In addition to assessing how the businesses that they could own or lend to are run, these investors are also looking at the products and services: are those improving the environment or the society in a demonstrable way? In asking this question and giving weight to the answer, impact investors are concurrently hoping for and building a positive future for the generations to come.

This is it: impact investing is investing with a conscience — and there are many tools and degrees to how that can be done, but those tools cannot define impact investing, they are just means to an end. What really defines impact investing is the spirit of using capital allocation decisions to move the world in a positive direction.

If a history needs to be offered for context, it shouldn’t be about who coined the phrase and who used it first, but a history of the world and a sign of our times:

For centuries, businesses and governments have been using natural resources as though they are infinite and have no impact on our world. That has turned out not to be the case and we cannot continue going down our current path. Businesses own and control a significant portion of our resources and their use of it, the decisions these businesses make and those made by investors to fund potential solutions has become imperative — this is the history of impact investing.

Despite the progress towards equality on many fronts, gender, sexuality, race, ethnicity, country of origin, social and economic class and many other arbitrary divisions continue to be at the center of unequal access to opportunity. Businesses have long prioritized short-term returns over all other considerations, and it is crucial that businesses and investors make decisions with the long-term and all its stakeholders in mind — this is the history of impact investing.

Philanthropic efforts and government regulations have been continually at odds with business interests — governments try to restrain the businesses and philanthropy cleans up after them. Investment capital, sometimes from the same source as philanthropic capital, is funding these competing interests, and the net effect has been negative. This needs to change in today’s world of improved transparency and accountability — this is the history of impact investing.

If we are to go into details, Impact investing can perhaps best be defined by the United Nations’ Sustainable Development Goals — a set of objectives not just for the developing world (as the Millennium Development Goals were) but for the entire globe. A set of objectives on just for the decision-makers of foreign aid in developed countries, but for all decision-makers. These goals speak to the core problems that plague the world today — the solutions to which are central to the ideas pushing impact investing forward, but not as the singular tool to solve them.

That said, no one alone can solve everything or achieve all the Sustainable Development Goals with their capital, but what we can do is to join the movement, figure out which part of the equation we can contribute to, follow up on results and watch the system change.

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