“The evolution of impact investing over the last two decades has proven that capital is king when it comes to having real impact. In order to truly solve some of the world’s greatest issues in energy, agriculture, food, healthcare and general social wellness, we have to put serious economic focus into these areas” – The State of Impact Investing
Impact Investing essentially refers to investments made in companies or organizations which helps in attaining social or environmental gain along with a financial return as well. Impact investors seek to create a positive impact by investing, for example, in non-profits that benefit the community or clean technology enterprises that work towards a better environment. The term ‘impact investing’ was popularized in 2007 even though the practice had developed years ago.
Impact investing can be considered as an extension of philanthropy as well as a company’s Corporate Social Responsibility (CSR), however here, in addition to the benefits that it reaps for the environment and society, there are financial returns earned from it as well which can be reinvested in such initiatives.
Impact investing is also said to be a subset of Socially Responsible Investing (SRI) which advocates investments done in a way for the avoidance of harm to the environment whereas impact investing is an explicit positive investment which improves the same. To give a better understanding of SRIs, an example is the avoidance of investments in companies that manufacture or distribute cigarettes, thus avoiding the promotion of the same and preventing harm to the society.
There is a myth among traditional investors that such investments have considerable amount of risk and returns are low however the median IRR (Internal Rate of Return) for good deals is as high as 34%, as shown by a McKinsey report. Like any other investment class, the investors have a wide range of possibilities when it comes to returns, ranging from below market rates to above market returns.
Impact investments have attracted a wide variety of investors, both individual and institutional. Some of the common types of impact investments include green bonds, socially responsible ETFs and private sector impact investments. Also, investments in microfinance, community development finance and clean technology have its roots in the venture capital and angel investing community where the investors act as mentors for the growth of the companies. A McKinsey report in 2018 stated that impact investing is forecasted to grow to more than $300 billion by 2020.
In addition to the financial returns, it has already impacted the lives of 60-80 million people in India itself. In recent years, impact investing has become most popular for industries relating to healthcare, education, agriculture and clean and renewable energy. Additionally, many people also believe that with the increasing awareness and steps taken globally for climate change, societal improvements, etc. these companies will fare even better in the future thus investing in them now will generate increasing returns in the coming years.
The 2017 GIIN Annual Impact Investor Survey found that 60% of investors reported are actively tracking the financial performance of their investments with respect to the SDGs. Certain companies that are favoured by impact investing include Tesla (which is leading the electronic vehicles movement thus having a significant impact on the environment), Whole Foods Market (focusing on healthy food thus making it a sustainable company), etc.
While the concept of impact investing seems all on the up and up, there are certain disadvantages to it as well such as a restricted market for such companies, no consistent measure of the results and returns, incomprehensibility of the idea of impact and profitability as a simultaneous goal and many others however as the idea of impact investing is spreading, people are becoming more and more familiar with the upsides to it.
Relating impact investing with the recent changes in world leadership, there is going to be a significant move towards climate change and usage of clean energy thus spurring further development of many companies working in these industries, which is propagating an increase in impact investing. Joe Biden might also allow tax cuts and other incentives for an escalated investment for purposes beneficial to the environment and society. Additionally, with Biden’s promise to re-enter the Paris agreement after Trump had pulled out of it, the goals of the agreement can coincide with impact investing to a greater scale.
All in all, when we combine philanthropic work with financial returns, it gives rise to impact investing. With the increasing awareness and alarm towards climate change, importance given to sustainability as well as the increasing arguments against capitalism, there should be an increased focus by companies on impact investing. Considering the pandemic and the situation a lot of countries are in with relation to healthcare and finances, impact investing is important now more than ever.