Introduction to Impact Investing
There’s a common adage or belief in economics: markets are the best and most efficient way to allocate resources. And accordingly, societies should be organized along the principles of market capitalism.
In theory, capitalism promises an ultra-efficient world that on its own is able to price-in all costs and externalities and appropriately value and reward producers according to ability and effort.
Yet, evidence shows that unchecked capitalism often leads to environmental disaster and humanitarian crisis, in effect market failure.
One Possible Solution
Impact investing while certainly not a panacea to market failure, aims to redress some of unconstrained capitalism’s issues.
The field does this by presenting an opportunity for investors to channel capital based on their values with the aim of bringing about positive change. In other words, it’s a means for investors to intentionally impact environmental and social factors in a direct manner that is at the same time trackable, while making a profit. Hence the name: Impact Investing.
Refreshing Take
Impact Investing is a refreshing take on the traditional investment model by moving the focus away from short-term profits from a purely monetary point of view to long-term gains that takes into account environmental and/or social progress. In this way, impact investing harnesses capitalism’s capacity for human innovation to produce products and solutions to addresses the environmental and social issues of the day, without sacrificing financial returns.
Key Features
The growth of the sustainable investing over the past few years has led to a mushrooming of differing ‘forms’/ ‘disciplines’ of investing among which are termed as “responsible investing”, “ESG” and “sustainability”. These terms are sometimes used either concurrently or in some cases interchangeably leading to confusion among the general public. In truth these are distinct fields, with specific definitions, although not everyone can agree on those definitions.
Broadly, all of these ‘disciplines’ exist within a spectrum of environmentally and socially conscious investing. While there are differing definitions for ‘Impact Investing’, in general it has the following characteristics:
- Intentionality
While the concept of purpose driven investing based on values is not new, the concept of intentionality places the emphasis on the proactive upping of value, and within that the primary goal of producing a benefit for the environment or society or both. This is in contrast to more traditional forms of investing where the monetary return of investment takes the front seat and any environmental and/or social benefit is simply a by-product. Thus, intentionality represents a mentality shift.
2. Need for Financial Return
As with traditional investing, there’s a need for financial return. The difference is the expectation. This varies from investor to investor, some expect it to be non-concessionary delivering returns equivalent to the market, and others are more willing to expect below-market return. Either way, impact investing is not meant to be philanthropy.
Conclusion
Impact Investing is an emergent field that has garnered attention in recent years. While the ‘discipline’ doesn’t claim to be able to lead humanity to heaven, it does however seek to use the tools of capitalism to address some of the world’s most pressing challenges.
