Why Investors Really Care about Impact Investing
Last week in class Milo Werner spoke about how investors are rapidly becoming more interested in impact investing but didn’t mention more to it other than this type of investing benefits the world as a whole. While this may be true, I will discuss several key reasons why investors are starting to trend toward this type of investing that may not be intuitively obvious. First, for those that may not be familiar with the term, impact investing refers to any investment that is made into a company or organization with the intent to produce socially or environmentally beneficial results in addition to a financial return on investment. These investments are typically made in emerging markets but also take place in developed markets.
Traditionally, one would expect investors to care only about maximizing profits in order to please shareholders without reserving any thought for social or environmental impacts. And why should they care? After all, investing isn’t about saving the world, it’s about using money to make even more money. However, while financial professionals admit that impact investing currently generates lower returns, there is a promising future in sight for these green investors. The investment community currently manages $60 billion in impact investing and has set a target to grow this section of the industry to $2 trillion assets under management by 2025 .
Several reasons contribute to why impact investing is just now catching on. Today’s consumers are tilting the market place in a direction that was inconceivable only a couple of decades ago. Consumers now desire low to zero carbon footprint products and rally behind companies with planet-friendly values. Employees are no longer afraid to speak out against their bosses or share viral posts about the environmentally harmful practices their company performs. Overall, it has become difficult for companies to hide illegal activities or perform questionable acts. NGOs are playing an important role in scrutinizing the actions of established companies and exposing them over social media platforms or even reporting them directly to Federal institutions. Emerging software tools allow investors to see the environmental and social record of companies to determine the risk associated with an investment based on whether they have been playing by the rules or not.
Moreover, energy rules the world and sustainability sells. Corporations bolstering sustainability efforts and producing green products are witnessing unprecedented returns. Investors are catching on to the impact sustainability can have in the corporate world. A part of the investment community known as socially responsible investors (SRI) are becoming prominent players by utilizing information such as environmental, social, and corporate governance (ESG) criteria to screen potential investments based on how harmful business are to nature . Not to mention, sustainable companies reduce waste and conserve energy, increasing profit margins.
It is important to note that impact investing isn’t all or nothing and there exists a spectrum of investors as demonstrated in the figure below. While pure impact investors place financial returns below or on par with social and environmental impact, others retain profits as the primary goal while considering assets like ethical values, sustainability and social consciousness .
Impact Investment Spectrum, based on materials by Brian Walsh, Scott Lawson, and Laurie Lane-Zucker. Image credit: Impact Entrepreneurs