Clarifying the Difference Between Responsible Investment and Impact Investment
If you’ve spent some time on the topic of Socially Responsible Investing (SRI), you may have come across different notions describing these practices including responsible investment, impact investing and philanthropy. And, you may have wondered: is it just a question of semantics or are there actual differences between the terms?
We hope we will give you a better understanding of these approaches, which are often intertwined in people’s minds.
First of all, let’s set the scene and present a spectrum of investment behaviours. This spectrum starts with traditional investments and goes right through to Philanthropy. And in between, you will find:
So now that we visualise the different types of investment, what behaviours do these words entail?
A Traditional Investment will be an investment solely focused on the financial returns with no additional considerations.
A Negative Screening Investment means that the fund defines a perimeter — geography, industry, practices etc. — in which it will not invest in specific sectors (gambling or Oil&Gas for instance). In these authorised areas of investment, financial returns will remain the fund priority and no action will be taken to lead the portfolio company towards more responsible behaviours.
A fund performing Responsible/Sustainable Investment will define criteria to consider while screening and analysing investment opportunities. It is a positive screening approach which puts Environment, Social and Governance (ESG) factors at the heart of the investment process on the same foot as financial KPIs, legal, social and tax issues. Hence, responsible investors want the companies’ business model to “do no harm” (based on UN SDGs criteria for example) and to potentially “do well by doing good”, as they will also look at their business practices (i.e. if the company operates its business in an ethical way).
Then, on top of being responsible, the Impact Investment will seek for a business model which has a positive output on society or the environment and where financial returns are no longer the first priority.
…. And finally, Philanthropy which is rather self-explanatory
The good news is, if you are asking yourself the question of the differences between all these types of investment practices, it means something. It means that more and more investors are willing to change the economy for the better.
But where does Gaia Capital Partners stand in all of this?
Gaia is a Responsible Investor. We definitely have a positive screening process in place and we want to contribute to shift our economy to the right side of the spectrum. We believe in transformation and we also strive to prioritize in our dealflow companies that are on the edge of impact investing while still matching our growth, scaling and financial return expectations. They are typically in circular economy, sustainable mobility or healthcare.
We are well aware that most entrepreneurs are focused on their top line but we find that tech company executives are particularly keen to address issues of responsible innovation as they belong to a new generation that shows genuine concern over the role and mission of their company. We want to help them accelerate on sustainable business practices by initiating a chain reaction which comes from the top (Board level) and benefits all.
We encourage our portfolio companies to adopt best practices while they are still at human size and in full expansion; and we identify their next priorities and define objectives.
And since it is difficult to manage what you can’t measure, after our investment we encourage management to implement sustainable KPIs to monitor change over time. But this is another topic we will discuss later.