Impact investment: why business chooses socially significant projects
The term “impact investing” appeared in 2007, when the Rockefeller Foundation sought definitions for investments aimed not only at financial gain but also the positive impact on society and the environment. Over time, impact investment has increased tenfold. So in 2020, according to the Global Impact Investing Network, the impact investment market reached $ 715 billion.
What differs from ordinary charity investment is that the investor does not give up the financial benefit, although it may be minimal. But they are not called business alone either: impact investments must be of public or environmental benefit. Moreover, the desire to reduce the negative impact of business on society and the environment has become one of the prerequisites for the emergence of impact investment.
A thin line
The term “impact investment” is not unique among investors. Also used:
- ESG — environmental, social, and managerial parameters of investments that can have a significant impact on their effectiveness. The factor of financial success remains the main one, and the ESG analysis should contribute to this.
- SRI (socially responsible investing) — a step forward compared to ESG; selection of investments in accordance with certain principles and active avoidance of those that contradict them. The main motive here may be personal, political, or religious beliefs. SRIs are considered part of impact investing, as they should also have a positive impact on the environment.
- Green investing — investment in business activities that have a positive impact on the environment. One of the types of SRI.
Both individual investors and organizations can become impact investors:
- various financial institutions/banks;
- financial institutions of development;
- private funds;
- pension funds and insurance companies;
- family offices;
- individual investors;
- non-governmental organizations;
- religious institutions.
Projects
Beam, India
The Indian company Beam has raised private investment to finance a business project aimed at serving the “non-banking” part of India’s population. That is, those who never became customers of banks. Beam allows citizens to use electronic payment systems even without a traditional bank account.
"Impact investment is a challenge to the belief that social and environmental issues can only be addressed through charitable donations, and market investment should only be aimed at financial gain," the Global Impact Investing Network said.
Craft3, USA
A non-profit organization that provides assistance and financing to businesses, individuals, companies, and other entities that do not have access to traditional financing. Craft3 only funds those that are for social or environmental benefits. For example, it provides loans to individuals who want to increase the energy efficiency of their homes.
Four main features of impact investing:
- Motive. The investor’s intention is to make a positive social or environmental impact through his investment.
- Return on investment. Impact investments should bring financial benefits or at least a return on investment.
- Wide-scale of profitability. Impact investments can be focused on a market return lower than the market, but close to it, and simply a return on investment (sometimes called preferential). The Global Impact Investing Network says that 67% of impact investors choose the most financially attractive projects. Sources of funding can be cash, fixed income, venture capital, private capital, etc.
- Impact measurement. A characteristic feature of impact investments is that the investor is obliged to assess and report on the social and environmental results of the underlying investment, to ensure transparency and accountability of investments.
What’s next
Socially and environmentally responsible investments are growing rapidly. In 2020, in the United States alone, such funds were replenished by $50 billion.
Massive infusions of money into any sphere, even a noble one, are dangerous by “inflating” economic bubbles, as it was in the dot-era era, writes Church Investors Group Vice President Stephen Beer in a column for the Financial Times.
“Investors should pay attention not only to the potential benefits for society but also to the financial reward. If these two things are not interconnected, someone will have to pay for it,” he added.
Investments in green technologies are growing especially fast today – so much so that some experts talk about the “green economic bubble“.