An ice cream franchise providing skills training to inner-city youth. A food company providing healthy, balanced meals to schools in poor neighborhoods. A cosmetics company sourcing raw materials from small farmers in Brazil. A bakery offering employment to people regardless of social and educational background.
Sound too good to be true? These are examples of impact investing. Businesses involved in impact investing allocate assets towards goods and services that bring about positive social impact. Impact investing can create real value for investors and society as a whole. Healthy, balanced meals for schoolchildren, for instance, can lead to better academic performance for the students. Further, when the students perform better in school, they may become productive adults in the future.
Key Characteristics of Impact Investing
Aims to Have a Positive Environmental or Social Impact
Impact investing uses investments to help address social and environmental issues like climate change, hunger, poverty, homelessness and the HIV/AIDS epidemic.
Has a Financial Return on Capital
Impact investing is foremost a business activity and, therefore, expected to yield a financial return on capital or, at the very least, a return of capital.
Spans a Broad Range of Sectors and Regions
Impact investing is inclusive across asset classes, from cash equivalents and microfinance, to private equity and clean technology.
Measures Social/Environmental Impact Regularly
The impact investor regularly assesses and reports the social and environmental performance of existing investments to ensure transparency and accountability, and inform potential investors.
Why Venture into Impact Investing?
Conventional wisdom suggests that philanthropic donations and state subsidies are the only solutions to environmental and social issues. The goal of business, after all, is to generate profit—and this goal may come into conflict with objectives such as environmental conservation and responsibly-sourced consumer goods. Impact investing dispels these beliefs by offering opportunities for investors to invest in—and, ultimately, profit from—social and environmental solutions.
Following are specific opportunities that may result from impact investing:
Complement Existing Philanthropic Budgets and Public Sector Resources
It is true that philanthropic budgets and public sector resources address social and environmental challenges. These funding sources, however, are limited. Impact investing can augment existing philanthropic budgets and public sector resources. Since impact investing can satisfy a wide range of social and environmental objectives—from mitigating global warming to providing basic healthcare to Third World countries—it can add a significant amount of private sector capital to the two aforementioned funding sources.
Ensure Business Continuity
Unsustainable practices can deplete the planet’s resources. Without raw materials that can be turned into goods and services, businesses can be crippled. Impact investing is a great way for companies to avoid this. By investing in social and economic objectives, companies help create benefits such as resource conservation and a healthier workforce. These benefits, in turn, can translate to greater profits and business continuity. Impact investing may cost companies time and money, but it is an effective path towards ensuring business continuity.
Attract Client Investors
Millennials (the generation of people born between 1980 and 2000) are regarded as the wealthiest generation in history. As of 2014, according to The Shullman Research Center's report, Insights into Luxury, Affluence and Wealth: Millionaires Have Their Own Generation Gap , Millennials constituted 23% of millionaires in the US, meaning that there were 5 million Millennial millionaires in the US in 2014. In sharp contrast, there were only 4 million Gen-X (the generation born between 1960 and 1980) millionaires in the US in the same year.
Impact investing is one way to transform Millennials' wealth into business opportunities. US Trust’s 2014 survey, Insights on Wealth and Worth , revealed that 67% of Millennials viewed their investment decisions as “[ways] to express [their] social, political or environmental values.” In addition, 73% of Millennials believed that “it is possible to realize market-rate returns investing in companies based on their social or environmental impact.” Based upon these findings, it follows that Millennials are a generation of investors committed to furthering the social good. Millennials are actually putting these principles into practice. According to a 2013 Spectrem study, 47.42% and 35.76% of investors below 36 years old are familiar with socially responsible investing and impact investing, respectively.
Draw Resources to an Organization's Projects and Initiatives
Impact investing can help organizations become self-sufficient by enabling organizations to carry out their projects and initiatives without having to rely heavily on donations and state subsidies. A soup kitchen, for instance, can develop business plans that will generate both revenue and investment returns in exchange for a larger upfront donation. This plan may carry the soup kitchen towards self-sufficiency and, at the same time, earn profits for the donors.
Strengthen Working Relationships between Stakeholders
Impact investing can strengthen working relationships between stakeholders, and build new ones. An organization that turns to impact investing to augment its resources can meet like-minded innovators and entrepreneurs (both from the for-profit and the nonprofit sectors) that can provide them with much-needed facilities, products and services. This outcome, in turn, can convince grantees to invest in the organization as well.
Examples of Impact Investing
Impact investing is a rapidly growing industry. According to the Triodos Bank’s September 2014 report, Impact Investing for Everyone: A Blueprint for Retail Impact Investing , impact investors committed USD8 billion in 2012, USD10.6 billion in 2013 and USD12.7 billion in 2014. In addition, Impact Investments: An Emerging Asset Class , a November 2010 report by J.P. Morgan, The Rockefeller Foundation and the Global Impact Investing Network (GINN), revealed that by 2020, the amount of invested capital in the impact investing market could reach between USD400 billion and USD1 trillion.
TOMS Shoes is well-known for its various impact investments. Its One for One Movement, for example, gives a new pair of shoes to an impoverished child for every pair of shoes that it sells, and part of the profit from each pair of eyewear sold is used to restore the eyesight of a person in need. Purchases of TOMS bags help fund the training of skilled birth attendants, as well as the distribution of “safe birth kits” containing items that facilitate safe childbirth (e.g., soap, gloves, gauze, cord clamps, surgical blades and clean surfaces).
TOMS Shoes similarly invests in companies that promote environmental and social solutions through their products and services. The shoe giant’s investment portfolio includes Back to the Roots (an Oakland-based organic food startup), Cotopaxi (an outdoor gear brand that funds sustainable poverty relief) and ArtLifting (an online store that sells the artworks of homeless and disadvantaged artists). TOMS Shoes encourages social entrepreneurship through the TOMS Social Entrepreneurship Fund. Interested organizations can apply for and secure up to USD100,000 in funding from the company.
LeapFrog Investments is a foreign fund manager backed by George Soros and J.P. Morgan. It invests in sustainable insurance businesses that cater to low-income clients in Asia and Africa. LeapFrog Investments’ portfolio includes Apollo (Kenya), All Life (South Africa) and Mahindra (India). Apollo provides microinsurance services such as livestock insurance. All Life offers affordable life insurance and disability cover for diabetics and people living with HIV/AIDS. Mahindra specializes in rural and agricultural finance for poor Indians. In 2014, LeapFrog Investments raised USD400 million for social impact investments in Asia and Africa.
DBL Partners invests in highly profitable but socially responsible businesses in the Cleantech, Information Technology, Sustainable Products and Services, and Healthcare industries. Its portfolio includes Tesla Motors and online radio company Pandora Media. In June 2015, DBL Partners raised USD400 million for a social impact fund focused on social impact investments.
Village Capital invests in companies working in the fields of agriculture, education, energy and water, financial inclusion, and health. Village Capital will only invest in a company if it is upvoted by Village Capital's peers. Its portfolio includes Juhudi Kilimo (Kenya) and Citi (US). Juhudi Kilmo aims to increase Kenya’s small farmers’ income by improving agricultural resource efficiency. Citi’s goal is to narrow the achievement gap between high- and low-income students by supporting startups with technology solutions that can enhance education for low-income students. In July 2015, Village Capital raised USD13.2 million, to be invested in 75 global companies that strive for social impact.
Social and environmental problems affect all sectors of a community. When community members work together towards solving social and environmental problems, they can come up with more resources, and creative and effective solutions such as impact investing. Impact investing frees organizations from heavy reliance on donations and state subsidies, and encourages business to help by allaying their fears of profit loss. In the end, social and environmental problems are solved, while businesses continue to earn profits.
FirstCarbon Solutions (FCS) helps organizations recognize business drivers for sustainability practices and offers cost-effective sustainability management solutions . FCS provides guidance on industry best practices and can help you with your sustainability programs.
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