What is Impact Investing?

Impact Investing takes many forms

A wind farm at sunset

What is impact investing? Impact Investing is a form of investing that invests in funds or organizations that have the intention of creating or furthering a social or environmental cause in addition to generating a financial return. There is a long history of individual investors and funds avoiding certain companies or asset classes which they disagreed with. However, the actual term of impact investing emerged in 2007. The philosophy is that investments should be scrutinized for their social and environmental influence with the same rigor as their financial performance. Although a small part of the overall investment world, impact investing has been gaining in popularity. They have even seen support from certain pension funds.

Impact Investing Defined

The GIIN, or Global Impact Investing Network defines impact investing by a set of criteria. They are as follows:

INTENTIONALITY – An investor’s intention to have a positive social or environmental influence through investments is essential to impact investing

INVESTMENT WITH RETURN EXPECTATIONS – Impact Investments are expected to generate a financial return on capital, or at a minimum, a return of capital

RANGE OF RETURN EXPECTATIONS AND ASSET CLASSES – Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.

IMPACT MEASUREMENT –  A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.

But Is It Effective?

Does impact investing work? There are studies that claim both yes and no. There are multiple studies that claim that impact investments underperform more traditional investments, but it is debated as to exactly how much. Economists also claim that a lot of the so-called impact isn’t being checked for effectiveness.

Trying to seek out a company that will do social good in advance isn’t easy. It is actually nearly impossible. In other words, there is no linear path to follow. There are lots of moving parts. Simply investing in a solar panel company because of some perceived good it will do for the environment does not automatically translate to positive social impact. The company could go bankrupt. It could put another company out of business causing job losses and financial hardship. The company itself could be using illegal accounting practices. Not to say finding a company that will be successful and do good is impossible, but it is hard and not as straightforward as some people think.

It is suggested that much of the industry isn’t putting in the work and properly vetting companies and investments. Much of the focus is placed on the founders or employees and not on the results of the actual business.

The stock market is big and complicated. Social good doesn’t necessarily equate to profit or success in the marketplace. Like everything there is a trade-off.

Conclusion

What is impact investing? It is investing in such a way to generate a return and do social or environmental good simultaneously. I think that impact investing is better than nothing, but if you want to do real good, then donate your time or money to a specific charity or cause. There is no definite proof that impact investing is actually working, and there is no real way to measure its effectiveness. As I suggested, it is better than nothing if you aren’t going to donate anything to charity. But, if you do put your money into impact investments, then you will be shorting yourself returns, and you will have no real way of knowing if your investments are having the desired positive results. Buyer beware on these investment vehicles.

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