Why Is Impact Investing Important
Impact investing is important because it challenges the traditional opinion that social and environmental issues should be addressed by charitable donations alone. For a long period of time, investors have been told that they should only focus on market investments that achieve financial returns exclusively, impact investment shows that there is another way. Impact investments can, therefore, be seen as important because they are changing the culture and norms of investing.
Social Impact Depends On Three Things
What About Environmental Social And Governance Investing
ESG investing is about critically viewing an investment targets environmental, social, and governance practices in the due diligence phase of investment. The key difference between ESG and impact investing is that ESG typically serves as a screen to weed out companies with unacceptable practices, whilst still prioritizing the maximization of financial returns.
For example, lets say an institutional investor was evaluating investments in multinational clothing companies, they may view supply chain practices as a key ESG metric because they want to make sure any target companies avoid the use of child labor and ethically source their raw materials.
ESG is most commonly used in the context of public market investing, where one is evaluating the environmental, social and governance structures of a given company and evaluating whether that entity is taking sufficient steps to meet or exceed specific areas of corporate responsibility.
Some research suggests these ESG-focused investments can actually lower the riskiness of an investment. To illustrate, if you know a target company maintains an ethical supply chain, the risk of damaging headlines about child labor practices are greatly reduced.
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Investment Philosophy And Process
The best impact investment companies in the listed equity space are innovative and often disruptive businesses. To select the best candidates, UBP has developed its own methodology. This proprietary scoring system sits at the heart of the investment process, enabling our impact investment experts to assess the impact intensity of the companies under review. Each IMAP criterion is marked out of 5, giving a total score out of 20:
The role of engagement
Impact investing is relatively new in the listed space. Engagement with companies is the most effective way to gain clarity on the true intentionality of a business. A constructive and honest relationship with a companys management also provides the necessary encouragement and support for the company to deepen and broaden its measurement and disclosure of non-financial KPIs which are relevant to the investor. Engagement is embedded in every stage of the investment process, from the initial investigation of a company to the impact assessment.
Key milestones in UBPs Impact Universe
Businesses Will Not Alter If Not Influenced
Businesses have always been a source of innovation and change. In the past, businesses have been the drivers of world-changing innovations such as the automobile, the telephone, and the internet. Today, businesses are once again at the forefront of innovation, with companies leading the way in developing new technologies that are changing the world.
However, not all businesses are equally responsible when it comes to environmental sustainability. In fact, a large number of businesses are still engaged in practices that are damaging to the environment, such as emissions from factories, deforestation for palm oil plantations, and the overuse of plastics. If we want to create a sustainable future for our planet, it is essential that we encourage businesses to adopt sustainable practices.
One way to do this is through government regulation. By setting standards for emissions and other environmental impacts, governments can incentivize businesses to adopt more sustainable practices.
Another way to encourage sustainable business practices is through consumer pressure. When consumers demand products that are environmentally friendly, businesses have no choice but to respond.
Finally, impact investors can also play a role in promoting sustainable business practices by investing in companies that are leading the way in sustainability. By working together, we can ensure that businesses play a positive role in creating a sustainable future.
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There Is No Such Thing As Neutral Investment
Every investment has a measuring impact. Every investment is a decision to make the world more like one thing and less like something else. When you invest in a socially blind or ethically dubious company, what impact does that have on the world? Businesses, after all, are the engines that drive our economies, and your money is the fuel that powers them.
As socially responsible investors, we need to ask ourselves what impact our investments are having on the world. Are we funding companies that are polluting the environment or contributing to social injustice? Or are we supporting businesses that are working to make a positive difference?
When you invest in companies that are making positive changes in the world, you are not only helping to create a better future for everyone, but you are also supporting businesses that are more likely to be successful in the long run. Sustainable businesses are resilient businesses, and they are usually better managed too. So ask yourself: what kind of world do you want to live in? And then invest accordingly. because remember theres no such thing as a neutral investment.
The argument that your investment management dont matter, or that you can invest without consideration is untenable. We have a choice when it comes to how our money influences the future, and its time to start making choices.
Socially Responsible Investing Vs Impact Investing
Socially responsible investing is focused on deploying investment dollars in a responsible and positive way. Typically SRI involves the use of negative screens or filters when selecting investments. Often these screens ensure that a fund avoids investing in certain things the fund manager deems undesirable like companies that produce weapons, tobacco, and oil.
In contrast, impact investing actively seeks out investments that will create a positive economic, social, or environmental impact. Another way to think about this is as do no harm for SRI versus do good for impact investing.
Board Of Directors Responsibility
Governance refers to corporate governance, a system of controls and procedures by which individual companies are managed. A board of directors specifically is seen as the central pillar of the governance structure, serves as the link between shareholders and managers, and acts as the shareholders internal monitoring tool within the company. A concrete responsibility for boards of directors is to act in the interest of shareholders, those who have invested in the company. This means that if impact is part of shareholder value, it needs to be measured and protected by the board. For example, part of the B Corporation Certification process involves companies amending their legal governing documents to require their board of directors to balance profit and purpose.
This is why accountability and transparency measures are necessary for impact investors to consider before investing their capital without these measures available, companies run the risk of investors passing them by, or of withdrawing support. This also addresses the problem of greenwashing, or conveying a false impression or promoting misleading information to a potential consumer about the progress of ESG goals.
Movements Systems Change And Markets
Our world has become more integrated, but frameworks and practices remain largely separatewith the private sector actors, policy makers, and philanthropists staying in their own lanes. Sitting at the nexus of investment, philanthropy, and policy , impact investing combines the distinct institutional elements of these sectors. The interaction of policy, philanthropy, and investment is not new, but understanding the distinct attributes of these sectors is essential for the structuring of effective impact investments.
Impact investing has emerged out of social and environmental movements as well as the intention of investors to use investment tools to shift systems and drive positive change. One important example is divestment from South Africa in the 1980s in order to change the apartheid system. More recently, we have seen the expansion of specific investment lenses to engage systemic issues.
Many people believe that the complex challenges and wicked problems facing the world today can only be solved through integrated approaches to policy, philanthropy, and investment. Systems change is about addressing the root causes of social and environmental problems, which are often complex and embedded in networks of cause and effect. It is an intentional process designed to fundamentally alter the components and structures that cause the system to behave in a certain way.
Where does impact investing come in? Intentionally or not, investors change systems.
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Vehicles For Impact Investment Include Bonds And More
Impact investing is often associated with green or social impact bonds, which raise money from investors for specific types of projects. Bonds are driven by institutional investors, and can be issued by governments, corporations or public-private partnerships. Here are some examples:
In 2016, the International Finance Corporation worked with mining company BHB Billiton, and the nonprofit Conservation International to issue a $152 million bond to protect forests and expand carbon-credit markets in developing countries.
In 2017, Canadas Heart and Stroke Foundation launched the first national health-focused social impact bond, in partnership with the Public Health Agency of Canada and the Mars Centre for Impact Investing.
After the Paris climate accord, France issued a EUR7 billion green bond, while Apple proposed a USD $1 billion green bond to fund renewable energy generation.
Impact bonds are popular and typically oversubscribed for instance, the total demand for the French bond exceeded EUR 23 billion.
But impact investing goes beyond bonds. It also includes:
Innovation is everywhere securitization offers endless possibilities. Impact investing has become a sort of Research & Development for finance.
Why We Should Care About Social Impact
The traditional answer is that we should care because we should care about the world and other people.
A better answer is that you want to create social impact for the same reason you want to create wealth: because you want to make a positive difference in the lives of others.
When you create something of value, you enrich the world and enable other people to live better lives. You can do this as an individual or as part of a team either way, its good to create something of value.
Social impact is necessary for our sustainability. We live in a world thats changing rapidly and unpredictably.
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Calculating The Value Of Impact Investing
Impact investingdirecting capital to ventures that are expected to yield social and environmental benefits as well as profitsprovides investors with a way to do well by doing good. But whereas the business world has tools for estimating a potential investments financial yield, it lacks them for estimating social rewards in dollar terms. Now the Rise Fund and the Bridgespan Group have developed what they call the impact multiple of money to demonstrate the value of putting impact underwriting on the same footing as financial underwriting. In this article they explain their six-step process for calculating it: Assess the relevance and scale of a potential product, service, or project. Identify target social or environmental outcomes. Estimate the economic value of those outcomes to society. Adjust for risks. Estimate terminal value. Calculate the social return on every dollar spent. The IMM, they write, offers a rigorous methodology to advance the art of allocating capital to achieve social benefit.
Idea in Brief
Although the business world has universally accepted tools for estimating a potential investments financial yields, no analogue exists for evaluating hoped-for social and environmental rewards in dollar terms.
The Rise Fund and the Bridgespan Group have developed a methodology for estimating the financial value of the social or environmental good generated by impact investments.
How It Works
Current Priorities For Field Support Grants
- Catalytic Capital: increase knowledge, awareness and use of catalytic capital globally through the Catalytic Capital Consortium . MacArthur, The Rockefeller Foundation, and Omidyar Network jointly funded a three-year grant program, C3 Grantmaking, through the New Venture Fund, which will make its final grants in 2022.
- Investor Engagement: support investor learning, connection, and collaboration through multiple networks in the United States and globally.
- Impact Standards, Transparency, and Accountability: strengthen the practice of impact measurement and management and inform public policy.
- Diversity and Inclusion: support the advancement of historically underrepresented and marginalized groups within the fields of investing and finance.
Recipients of our grants and impact investments include traditional nonprofits, for-profit enterprises, special-purpose funds, public agencies, or quasi-governmental entities. Impact investments may take the form of debt, equity, or a guarantee and may be structured as a Program-Related Investments or Mission-Related Investments depending on specific investment characteristics and purpose.
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Types Of Impact Investments
Impact investments come in many different forms of capital and investment vehicles. Like any other type of investment class, impact investments provide investors with a range of possibilities when it comes to returns. But the most important thing is that these investments offer both a financial return and are in line with the investor’s conscience.
Evaluating The Size Of The Impact Investing Market
According to the Global Impact Investing Network , a total of 715 billion USD was managed by impact investors in 2020. This figure has grown significantly in recent years, yet is still small compared to overall global equity markets. For 2020, the equity market size was 89 trillion USD.
One thing that might hold investors back is the concern that targeting sustainability objectives could lower potential financial returns. While performance history is more limited, our view is that impact investments should performs as well or better than comparable traditional investments due to the scale of the opportunity set. The GIINs annual investor survey of 200 leading global impact investing institutions showed a majority indicating that their investments met expectations for both impact and financial performance, while 15 percent said their expectations were exceeded.
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Harnessing Markets To Scale Change
Pierre Omidyar, founder of eBay, and his wife Pam believe that the power of markets can create opportunity for people to improve their lives. Thats why they started a philanthropic investment firm, the Omidyar Network , in 2004.
Every year, they forego millions of dollars in potential tax deductions to be able to combine grantmaking and investment outside the normal umbrella of a foundation.
Through the experience of building eBay, they discovered the potential of unleashing market forces for good. They believe that scaling innovative organizations can be the best way to achieve impact and that scale can and should be attained through multiple pathways. This means that their social impact activities operate through both nonprofit and for-profit means. ONs organizational structure allows it to practice traditional philanthropy, make investments in worthy companies for a return, and influence policies that affect the enabling conditions for its grantees and investees to thrive for example, encouraging laws allowing charitable tax deductions, or engaging in policy discussions about interest rates for microfinance institutions. These interrelated goals reflect ONs strategic intent: to create systemic change.
To support that process, the Omidyar Network provided bridge funding a low-interest loan that offered MicroEnsure flexibility and time to put all the pieces together to make the transition into a commercial venture.
Resources & Glossary
Environmental Social And Governance
Environmental, social, and governance refers to the practices of an investment that may have a material impact on the performance of that investment. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. While there is an overlay of social consciousness, the main objective of ESG valuation remains financial performance.
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Why Impact Investment Is Important The Business Perspective
After having shed light on why impact investment should matter to the individual investor in my last article, I will now go on and explain why businesses should care about this movement too.
No matter if you are an up-and-coming entrepreneur, established businessman, or CEO of a multinational corporation there are a lot of good reasons for all types of businesses to shift their attention towards more sustainable and impact-orientated practices.
Here are five main reasons why the businesses that want to thrive tomorrow should care about impact investment today:
1. Investments in Impact Businesses are booming
There is a strong increase of attention and money given to impact businesses by VCs, governments, investment funds, and other actors and this is only expected to expand more. As the GIIN reports, $228 billion of so-called impact investing assets are managed by impact investors and $35.5 billion alone were devoted to 11,136 deals in 2017. There is a clear trend showing that the sector is getting bigger, offering more opportunities and making impact driven businesses more attractive for entrepreneurs.
2. Attracting customers and retaining talent
Furthermore, if you want to be able to attract and retain the talent that will make up most of the global workforce in the future, then you should definitely have a look at your companys purpose. As shown by a study by PWC, 88% of millennials want to work for a company with a social purpose.
3. Use the UN SDGs as a framework