We have just entered a new era of investing where the traditional dominant logic of maximizing shareholder value may not be enough to stay relevant, let alone outperform. What’s needed? Investors need to find a way to do what they do best, which means innovating with purpose.
The emerging segment of what’s now called impact investing is the first step in building a new investment paradigm, tackling actual challenges ( pension funds, environmental issues, financial resources, job creation, governance issues, climate change…) shaping private foundations, asset owners, private investors, equity investors into a new impact investing industry ( microfinance loans, renewable energy, gender equality, clean energy…) with a different and new range of returns: social responsibility, economic impact.
Impact investing or let’s say responsible investing is a new investment approach that seeks to create positive social, environmental, and economic change by partnering with businesses on a case-by-case basis.
In practice, this means investing in companies that commit to doing good while delivering shareholder value along the way like environmental impact and environmental benefits. It offers investors an opportunity to help build a more sustainable economy while enhancing their own returns.
Impact investors make up only a small subset of today’s institutional investors, but they are growing fast. The Global Impact Investing Network (GIIN) and JB Were Investment Management study shows that in 2014, impact investing assets under management grew by 62 percent to more than $50 billion. The same study predicts a growth rate of at least 20 percent per year over the next five years. Impact investing is already broad in scope and is expected to continue growing and diversifying even more.
There’s a clear mechanism for this future growth. Impact investment requires a connection between investors and businesses they might not have otherwise considered investing in. The partnership benefits are often not immediate, but early success can lead to increased funding, greater visibility, and increased social awareness among both investors and target companies.
So how is impact investments different from traditional investments? The main differences are its purpose and its approach. The purpose is the reason an impact investor looks to invest and mostly in social enterprises. By definition, traditional investors look for financial performance measured in dollars or shares of stock. Impact investing is about achieving social, environmental, or economic change with positive impacts.
Traditional investors look for a return on investment because they have a traditional understanding of the capital markets and their system’s financial elements. They understand the leverage that a business generates from its capital structure, including how much debt it carries.
In contrast, impact investors look to deliver returns on purpose. They are less focused on the financial metrics of traditional investing and more focused on outcome-based metrics that measure delivery against a clear and measurable purpose. The end goal is to achieve social, environmental, or economic change—not necessarily financial return.
But how does impact investing produce social change? Simply put, impact investing delivers financial returns to investors by creating a measurable impact in the social, environmental, or economic spheres. In other words, impact investors look for ways to support businesses that create positive change (social returns) while delivering financial returns.
The practice of Impact investing is also about a new approach to investing. It’s no longer accurate to think of traditional investors as fitting into an either/or bucket—either economically focused or socially oriented. Impact investors are interested in both potential returns and potential impact on the world around them with different strong returns: social impact, social outcomes, financial inclusion, economic development
