Impact Investing - investments made into companies, organisations, and funds with the intention to generate a measurable social and environmental impact alongside a financial return.
We used to hear from entrepreneurs and leadership teams some no-nonsense sounding statements to mean that they were not running the business for charity. Though, maybe, from a different perspective, this has been the mindset of the majority of entrepreneurs world over till recently. Of course, there were exceptions in the olden days too.
This perception about the goals of doing business has been transforming of late. People including entrepreneurs have started realising that they have to give back to society and contribute towards making the world livable for future generations. In other words, the desire to do their bit in making the earth a sustainable place for all living beings has been becoming the instinct of entrepreneurs. Sustainable growth is no more a charity but a must-morally, ethically, and regulatorily.
People, particularly the new generation, want their efforts to make an impact on society and not just maximise their wealth. Politics is one way to make such changes in the world but that is not easily accessible to all the people. The concept of impact investment might have evolved as a vehicle to facilitate non-political people (meaning people who are not actively pursuing a political life) to participate in opportunities that impact beneficial social and environmental changes. Keeping in line with the thought to develop sustainably, the newer generation of entrepreneurs have come up with investment ideas that are environmentally friendly.
According to GIIN, impact investments are “investments made to generate positive, measurable social and environmental impact alongside a financial return” and that “impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals.”
Impact investing companies are, therefore, not a pure philanthropic or charity investments. It is a hybrid form of investment that seeks a financial return on investment and is equally beneficial to social and environmental causes. The major difference between impact investment and normal investment is that the expectation of financial return can be equal to or even less than the market return rate.
Social impact investing is differentiated from other forms of investment mainly by the following some guiding principles:
1. Financial Return: Impact investment is not done without expecting financial returns. The impact investors expect to earn a financial return on their investment, equal to or even below the prevailing market rate.
2. Social Or Environmental Challenges: The financial return is not the only motto of impact investment. The impact investors aim to achieve a beneficial impact on society and/or the environment.
3. Measuring And Reporting Social And Environmental Impact: There are established mechanisms and metrics to measure the financial return. However, the impact investors want to measure the social and environmental performance using standardised metrics.
There are other forms or terms like social responsibility investment (SRI), economic, social, and governance (ESG) investing used interchangeably to mean impact investment. Not that it is fully wrong. However, there are some finer differences among them.
Socially responsible investing is about choosing investments based on specific ethical guidelines. It is understood to be a method to eliminate investment in negative list organisations based on the ethical, moral, and religious beliefs of the investor. For example, some investors don’t want to be part of cigarette and/or liquor-producing companies.
ESG as the term manifests involves investments in companies that pursue environmental, social, and governance objectives along with financial returns. Impact investment typically combines the characteristics of SRI and ESG.
Touching upon corporate social responsibility (CSR) is pertinent here. CSR is a statutory provision in most countries including India. Companies above certain thresholds have to mandatorily earmark a certain percentage of their profits towards CSR initiatives. Though investments in CSR-compliant companies is not a deliberate impact investment route it is in effect that, though indirectly. One differentiator that impacts investors should look at is the way CSR money is spent - whether spent just for the sake of compliance or to impact changes.
Impact investing redefines the relationship between capital and social good. While the term was coined in 2007 by the Rockefeller Foundation, the practice itself dates back centuries to early socially responsible approaches1.
In India, the pace of change is striking. With advancements in technology and a supportive regulatory framework, new opportunities are unfolding rapidly. By June 2024, investments totalling USD 437 million were made in 37 deals across sectors such as agriculture, climate tech, education and healthcare, with financial inclusion at the forefront2. This dynamic shift highlights how strategic funding is creating both financial returns and addressing pressing social needs across various industries.
Almost all categories of investors, both individual and institutional, have been attracted to such sustainable investing because of the changes in the perception of investment. The list of investor categories, though not exhaustive, includes the following:
Impact investments offer a variety of financial tools, from equity and debt to creative blended finance options. These avenues allow individuals to enjoy impressive financial returns while fostering social or environmental progress.
Capital can be directed toward sectors such as renewable energy, healthcare, education and many more, focusing on critical global issues. Whether in emerging or developed markets, these examples of impact investing provide adaptability. They create a direct connection between financial success and purposeful impact.
When taking a decision regarding impact investing, individuals or institutions evaluate several key aspects:
Selecting the right tools allows for a strategic approach that effectively balances potential gains with meaningful, well-defined impacts.
Directing funds towards initiatives tackling issues like poverty and climate change aligns these investments with the United Nations’ Sustainable Development Goals (SDGs). The 17 SDGs, which include No Poverty, Zero Hunger, Gender Equality, Climate Action and more seek to propel economic growth, while tackling issues of inequality and climate change. Even though SDGs are set for a federal and county/state governments, organisations at a micro-level have a role to contribute towards their respective governments achieving these goals. Impact investment, therefore, can be said to be indirectly a part of SDG.
More and more people are coming out intending to contribute towards making positive changes in society. As we discussed earlier, it is not possible for all to be part of politics to accomplish their goals. Whether politics is the genuine vehicle to make a positive impact on society is not the scope of this article.
That said, individuals, particularly millennials, want to invest their large disposable income to generate financial returns and as well contribute to improvement in society by way of preserving and conserving the environment, providing microfinance, education, shelter, etc. to the underprivileged sections of the society, and transparent corporate governance.
The individuals can achieve their goals by investing directly in the shares of selected companies or ESG mutual funds and other investment funds. It is not only individual or institutional investors who are keen on impact investments but enterprises too. Enterprises and large NGOs invest in startups with similar objectives of impact investments.
However, the challenge of measuring and reporting the impact benefits still needs improvements. Measurement and reporting of impact investment need more refined tools to capture data, analyse and report it to the stakeholders as the ultimate objective of impact investment is changing the world for the better.
As impact investing grows, its ability to combine financial returns and meaningful outcomes is becoming clearer. However, advancing the methods used to assess and communicate these outcomes is crucial. The path to aligning investment with positive change continues to evolve, requiring innovation and rigorous scrutiny to achieve lasting progress.
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