Published on October 3rd, 2014 | by Pete0
Impact Investing – what’s that all about?
If you have heard of ethical investing – the process by which some form of social, environmental or governance principle influences an investor’s investment decision – you might have been put off by stories that, despite its best intentions, ethical investing has fallen short of high expectations both for its virtuousness and its ability to provide the investor with a decent financial return. Well, Impact Investing isn’t ethical investing. It is not philanthropy either. But it is a viable alternative for those investors seeking to do more with their money that just earn a financial return.
What stands Impact Investing apart from ethical investing is that to qualify as an impact investment the business must have at its heart the intention to earn a risk-related financial return as well as do good socially and/or environmentally. Crucially both the financial return and the non-financial impact must be measureable – this gives the investor the best opportunity to make an informed investment decision that matches their risk profile and beliefs.
Just like any other mainstream investment, you can make impact investments in a wide range of asset classes including debt and equities. You can make impact investments that benefit society and/or the environment on your doorstep and across continents too. Importantly you can also target your investment to impact and improve certain areas of society whether it be clean energy, assisting those with mental heath issues, recidivism and much, much more.
But why should you as an investor be concerned about anything other than making a profit? The credit crisis and the subsequent upheaval both economically and socially holds many of the answers. In the boom period leading up to the crash, individuals, businesses and organisations neglected their duty as stakeholders in investments. We gave little thought to the broader implications of our investments, such as what impact is the business I am investing in having on society? How is it effecting our environment? Does the company engage with the community it serves and how does it treat its employees? It would seem that the ready availability of cheap money resulted in bankrupted nations, huge unemployment, a breakdown in society and a near collapse of financial markets, which cost the taxpayer trillions to sort out – and we are still paying the price.
Impact Investing is one answer to that problem. It is trying to bring balance to capitalism and it is also trying to change the perception that “ethical” investing comes at price for the investor. Remember, Impact Investing is not philanthropic. The movement is adamant that investors should not be sacrificing a financial return in order to invest for good. Like mainstream investments, Impact Investments offer financial returns that can range from below market (sometimes called concessionary) to risk-adjusted market rate or indeed above. It is for that reason impact investing is suitable for any part of a diversified portfolio. And by appealing to the wallets of capital market investors, Impact Investing has the ability to make a far bigger difference to the problems facing society today than charity alone could ever do.
David has worked in financial markets for the last 17 years, both as a trader and a journalist. He began trading forex at Japanese bank Sanwa, before dealing in equities with Abbey where he became a registered representative of the FSA and gained his CF30 qualification. For the last 9 years he has worked as a journalist for the BBC and Reuters writing cross-asset financial analysis.