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Impact Investing: Merging Profit with Value
As society and the environment are facing challenges that might be considered the worst in history, it only makes sense that a new form of investing comes to light, which is now referred to as Impact Investing. This strategy lets investors earn profits and at the same time do good for society and for the environment. While traditional investing focuses on making profits, impactful investing gives an opportunity to investors to embrace their values in their investment portfolio along with purpose, and making returns on their investments.
What is impact investing?
Investments that are made into certain companies, organizations or funds especially with the purpose of making a profit as well as having a tangible positive effect on society or the environment are known as impact investing. A plethora of areas can be focused on for such investments such as organic farming practices, the use of renewable sources of energy, the protection of the environment and wildlife, improving educational practices, and providing cheap housing.
Unlike traditional SRI, Impact investing encompasses a mindset that has an intent and a vision with a focus on positive results. SRI usually involves the selling of assets that companies have where a certain industry such as tobacco or weapons firearms might be linked, while with Impact Investing, it is a form of activism which seeks out opportunities where there is scope for making positive changes.
Quote by Thane Ritchie:
“Investors nowadays are not looking only for profit. They are looking for sense. Impact Investing enables you to invest in what you believe in and yet be profitable”
Relevant Areas in Impact Investing
There are many industries included under the umbrella of impact investing, each providing their own set of impacts and potential returns. A few of the most sought industries for impact investors as of today include:
- Renewable Energy
The renewable energy segment is probably one of the most developed and active target investment sectors for impact investors. Wind farms or solar energy projects, this segment not only answers the issue of global warming but provides great potential for growth as we wean off from fossil fuels.
As the International Energy Agency (IEA) estimates, up to $1.4 trillion are expected to be invested into renewable energy by the end of 2030, which means a lot as the world is gradually shifting to more sustainable and clean sources of energy. For investors, this means both near term profits from implementation and innovation but steady income as governments around the globe ‘greener’ energy solutions.
- Sustainable Agriculture
With the increase in global population, there is a greater strain on food systems to be enhanced and made more efficient. Sustainable agriculture looks at practices such that the natural resources conserved while the environmental impact is minimal.
Investing in advanced technological agricultural companies to promote sustainability has sent relief to many farmers and food producers. Sustainability is in high demand which is helping these investors turn a profit, meanwhile improving food security so these investments are crucial in the current age we are living in the,
- Affordable Housing
Affordable housing is a problem both the developed and developing world have faced across different eras. With the creed of providing social equality the idea of building affordable housing has caught the attention of impact investors so they can work alongside building low budget housing across certain locations. Low-cost housing has become a priority for urban development across many parts including the U.S and Asia.
Always including government incentives, affordable housing is often insured against loss through buyout schemes paying out low returns while they participate in safe housing projects helping ensure everyone has access to a home.
| Sector | Key Focus Area | Potential Financial Returns |
|---|---|---|
| Renewable Energy | Solar, Wind, Geothermal, Battery Storage | High growth potential, Stable returns |
| Sustainable Agriculture | Precision Farming, Conservation, Water Management | Steady growth, High demand for innovation |
| Affordable Housing | Low-cost housing, Urban Development, Government Incentives | Moderate returns, Long-term stability |
| Education Technology (EdTech) | E-learning platforms, Skill Development | High scalability, Growing market demand |
Understanding how concerns related to social equity and the environment are tackled through investment is a form of impact investing. Impact Investment forms a whole new branch of financing that aims to tackle solutions from a social multifaceted viewpoint rather than a profit-centric one, through the help of reliable tools and frameworks investment can prove to have a positive impact regardless of having a loss on the books.
Some of the impact measurement frameworks may be outlined as follows:
• IRIS+ of GIIN: This system gives standardized performance indicators to investors in assessing the social, environmental and financial returns.
• B Corp Certification: This certification guarantees that businesses have met the best social and environmental performance standards, publicly available accountability and legal responsibility.Impact investors often help portfolio companies establish clear objectives at the onset and measure their progress towards achieving these objectives at regular intervals. This orientation towards accountability and transparency has been beneficial in earning confidence and expansion in the impact investment space.
Trend: Impact Investing in Climate Tech
Today climate technology is probably one of the most popular domains for impact investing. The climate issue has become one of the most challenging issues and thus embracing start-ups or mature businesses that aim at cutting carbon emission, saving resources, or targeting the industry for greener processes has been the way forward.
For instance, billions of investment are coming into companies which focus on carbon capture technologies (i.e. removing carbon dioxide from the atmosphere). With climate change targets being set around the world, impact investors are focusing on finding businesses that will invest to meet climate goals.
Use Case: Climate Tech Startups
For example, there is a startup that is still in its infant stage, but manages to utilize AI in order to improve how power is consumed in smart cities, which would lead to a decrease in waste and the reduction of the carbon footprint. Investors in this type of businesses are not only helping in fighting climate change, but are also making an investment in an industry that is bound to boom in the near future with the rapid rise in urbanization across the globe.
As Thane Ritchie is known to say, “Impact investing is all about goodwill but also about putting money into companies that will be viable and profitable over longer periods. These are practical issues which when resolved would unlock great amounts of value”.
Financial Returns in Impact Investing – The Myth of Trade-offs
One of the most touted misconceptions surrounding Impact investing is that all investors who are concerned about doing good and investing in positive things are likely to lose money or investment returns. However, the recent evidence conducted suggests that this dichotomy is not as overly real as people perceive it to be. As of a report analysing global trends in impact investing from 2020 by the Global Impact Investing Network (GIIN), over 80% of impact investors claimed that they either met or exceeded their baseline expectations for financial performance.
Furthermore, the historical volatility of impact investments appears to be less than that of traditional investments. This is largely due to the fact that the companies which are engaged in socially responsible investment are better able to weather the storm socially and economically. In particular, the COVID-19 pandemic saw companies operating in areas such as digital education, healthcare access and sustainable supply chains growing substantially.
Challenges and Risks in Impact Investing
Even though there is a huge opportunity in impact investing, its not an easy task. One of these that is most apparent includes greenwashing, where businesses overstate or inaccurately characterize their positive social or environmental effects. It is not right that there is no effort done for evaluation, that the company’s claims regarding investment objectives are going to be measures that matter.
Besides, impact investing requires a wide horizon. Some areas including renewable energy and affordable houses have reliable returns; others will take years to realize. The combination of the two alone should enable the impact investor to not only seek financial returns but also social impact.
Final Thoughts: Integrating the Motive with Profit
Investors are increasingly switching to impact investing which allows them to believe that as long as their capital is put to good use, they can expect profits. With regards to this, there are many sectors such as renewable energy, sustainable agriculture, affordable housing, climate tech etc which can be classified as impact sectors and which are ready for impact investing.
For those investors who are ready to make a difference, it is important that they measure their objectives as well as their financial performance. As Ritchie said, “The best portfolio is where the world is made a better place, one investment at a time”.