Looking at the Social Significance of Impact Investing
In their latest corporate finance column, Les Nemethy and Sergey Glekov look at how impact investing can transform the perception of money as a source for good.
Impact investing, as that first word implies, is all about investing to make a positive impact on the world, not only generating a financial return. One may define impact investments as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
This is not the same as charitable donations, where the donor typically expects nothing in return (except for perhaps a tax deduction). They each have their own separate and crucial roles. Impact investing has been growing exponentially all over the world recently, even partially displacing traditional charitable donations.
Charities are important and effective in meeting immediate needs, such as food, shelter, and sanitation. Social impact investments can be more effective in stimulating long-term sustainability through job creation and entrepreneurship.
Impact investment may appeal to a wide variety of individual and institutional investors, including:
• Fund Managers
• Development finance institutions
• Diversified financial institutions/banks
• Private foundations
• Pension funds and insurance companies
• Family Offices
• Individual investors
• Religious institutions
There are three key characteristics of impact investing. Firstly, there is the intent to produce a positive social impact through mobilizing capital. This is the central idea of the whole concept of impact investing.
Next are the positive financial returns. The target range of returns for impact investments may range from below market to market, depending on the investors’ strategic goals. Based on a 2019 survey of social impact investors throughout the world, a majority of impact investors still choose to pursue competitive, market-rate returns. But this is not always the case.
The third and most challenging aspect of impact investment is measurement of the impact on the world. The Global Impact Investing Network (GIIN, thegiin.org) establishes criteria for measuring impact:
• Declaring the social or environmental objectives that an investment is attempting to accomplish.
• Using standardized metrics to set performance targets for these objectives.
• Utilizing Key Performance Indicators (KPI’s) to measure performance and optimizing specific parts of a business model.
• Reporting social and environmental performance in the context of the standardized metrics that were previously set.
According to GIIN, aggregated assets under management in the impact investment industry was estimated at USD 502 bln as at the end of 2018, as laid out in “Sizing the Impact Investing Market” report by GIIN . The growing impact investment market provides capital to address the world’s most demanding challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and housing.
A majority of impact investing organizations is headquartered in developed markets, mainly in the United States and Canada. However, impact investing is a global phenomenon, also with strong roots in Central Europe.
The impact investment ecosystem in the Visegrád countries is relatively well-developed, despite still being in its early stage. A lack of concise national-level strategies and gaps in cooperation between entities needs to be addressed in order for the region to ensure the impact investment ecosystem develops to its full potential, according to the “Social Investment Leveraging Index, Investing for Impact in Central and Eastern Europe” by Deloitte .
For many years, numerous investors have been avoiding investments in the so called “sin” industries like alcohol, tobacco, armaments, etc. Impact investment might be viewed as an extension of that trend, to actively seek out investments that will make the world a better place.
One might also view investing in certain high-tech firms as a form of impact investing, if the technology (for example, MedTech or drug research) makes the world a better place.
There is a perception in society in general that money is often a source of evil. Impact investing is proof positive that money can also be a source for good.
Les Nemethy is CEO of Euro-Phoenix (www.europhoenix.com), a Central European corporate finance firm, author of Business Exit Planning (www.businessexitplanningbook.com) and a former president of the American Chamber of Commerce in Hungary.
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