Impact Investing

Impact Investing: Rising demand for Social Responsibility

A strategy of investing that seeks to generate both financial returns and specific social or environmental benefits is called impact investing. This approach actively seeks to have a positive financial impact.

The purpose of impact investing is not only to generate financial returns but also to contribute to social and environmental welfare.  

88% of impact investors exceed their investment targets, according to the Global Impact Investing Network.

The impact investment strategy and an asset class are frequently confused. Impact investments are channelled through asset classes such as effect stocks, impact regular income, and impact other assets (private equity, venture capital, debt). Impact investment funds are used as growth capital, loan financing, and seed or early-stage capital investments. 

While this approach allows for a wide range of expenditures, it requires two critical components: intentionality and measurement. The investor’s aim should incorporate both social effect and financial return. While there is more agreement on financial return on investment (ROI) measurements, an impact investor should also attempt to quantify the social impact.

All investments, in reality, have an effect on society, both positive and harmful.

Impact investors look for investments with a verifiable positive social impact.

Donations and impact investments have fairly similar motivations, but they operate differently. Benefit investments aim to generate quantifiable social and environmental impact and are performance- and outcomes-driven. The latter need to provide openness and accountability into how impact investments use resources.

Conventional investments are aimed at investors seeking financial returns. For those investors who want to generate a positive social or environmental impact while achieving a reasonable return, “impact investments” are ideal.

Impact investments are mobilised to finance social enterprises in three ways:

  1. Embedded,
  2. Integrated, and
  3. External.

The economic operations and activities of the Embedded type of enterprise coincide with social impact endeavours. The finances of the enterprises allow social initiatives to exist as autonomous entities.

An embedded social company typically uses a non-profit structure to minimize mission drift; however, depending on the legal situation, it may alternatively adopt a for-profit structure. Companies like Microfinance, Amul, and SEWA are some examples of embedded social enterprise.

On the other hand, the social and business mandates of integrated social businesses overlap. Both sets of activities share expenses and resources, and they make use of both tangible and intangible resources such as competencies, brands, goodwill, relationships, and infrastructure. In this sense, social and commercial actions are mutually beneficial. Example: Scojo India, Aravind Eye Care.

External social enterprises such as Industree Crafts Pvt. Ltd. (Mother India) and Waste Wise Corporation effectively distinguish their social initiatives from their business operations. In general, a non-profit establishes an external firm to earn funds to support its social programs and operating costs.

Three Principles of Impact Investing

  1. A conscious aversion to investing in initiatives that are harmful to social and environmental concerns.
  2. The development of new sources of investment capital for socially and environmentally responsible entrepreneurs and enterprises.
  3. Extending the first rule in order to achieve positive change (either social or environmental). This concept distinguishes impact investing from sustainable and accountable investment and puts it closer to charitable finance on the spectrum between this sort of funding and conventional finance.

It stems from socially responsible investing (SRI), which focuses on companies that promote social justice, environmental sustainability, and corporate ethics. A step further than traditional investing, impact investing seeks to make a positive, significant impact on society.

Some examples of Impact Investing

  • A project that involves investing in a company that is developing better methods of water treatment and purification.
  • Establishing private investment notes to finance employment and substance abuse treatment facilities for low-income communities.
  • Investing in mortgage-backed securities to finance affordable housing for low-income individuals.

Impact Investing’s potential in India

The birth of India’s impact investment sector can be traced back to the launch of the milk cooperative Amul and the banking sector’s priority lending exercise.

Founded in 2001, Aavishkaar and Acumen made impact investment a systematic investment strategy. India quickly became one of the most active South Asian impact investment destinations.

India has at least 75 active impact investors and over two million social companies. The three groups of impact investors in India are fund managers, foundations and institutions that provide development financing, high-net-worth people, and family offices.

SectorPercentage of impact investors investing in the sector (in per cent)Rate of return expected by impact investors (in per cent)
Financial Services(Excluding microfinancing)5815-20
Health care5810-15
Percentage of impact investments and expected rate of return across sectors in India

Easy Ways to Become an Impact Investor

No matter how much or how little money you have available to invest, you can practice impact investing in a variety of ways.

There are several ways in which you can become an impact investor:

1. Take action and become an activist

  • ESG measures can guide your investment strategy – ESG scores measure how well a company is doing on environmental, social, and governance efforts. 
  • Become a shareholder activist – Use your voting power to push companies towards sustainable practices.

2. Make Your Money Work for You

  • The easiest impact investment you can make is to buy a community investment note. A financial institution for community development is another option for investment. Your funds are invested in a pooled fund focusing on social impact, which is inexpensive. Investing in CDFIs enables the target communities to gain access to cash and obtain loans that they might not be able to obtain through the conventional banking system.
  • Your Cash Can Be Used for Good – By switching to a local bank, credit union, or community bank, you can support local businesses and economic development.
  • Invest in green bonds- environmentally friendly projects are funded with green bonds, and they’re easy to incorporate into a fixed income portfolio.
  • Invest in Social Impact Bonds (Pay for Performance) – They’re innovative financial instruments for funding effective social programs. 

3. Make the most of your equity

  • Impact-focused funds – They are available in both publicly traded securities and private offerings, such as early-stage venture capital and later-stage private equity. In many cases, they are tailored to particular causes, such as clean technology, sustainable agriculture, forestry, gender equity, community development, etc.
  • Crowd-funded projects – Direct investment of any size can help crowd-funded social projects and businesses get off the ground.
  • Become an Angel investor – Angel investing allows you to invest directly in enterprises you believe in. There are risks associated with angel investing, but it can be a powerful practice that empowers and elevates entrepreneurs.

Is Impact Investing Right for You?

Impact investing is a method you should pursue depending on your values and ambitions, as well as how well you grasp the options available to you.

Impact investing can be intimidating because it involves both financial ability and awareness of charitable issues—an uncommon combination, not to mention specific human resource and legal considerations.

Yet, there is a lot of potential in the field!

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