Social Impact Investing: Benefits and Recommendations for Investors
On August 19, 2019, nearly 200 chief executives met to redefine the purpose and role of businesses in society. The outcome of this meeting was a paradigm shift from the long-held corporate orthodoxy that shareholders’ interests are supreme to a standard that promotes “an economy that serves all Americans.” Although not entirely a new phenomenon, the Business Roundtable emphasized impact investing as a way to tackle the world’s most pressing problems – from climate change, violence, and poverty to social injustice. Impact investments, as defined by the Global Impact Investing Network (GIIN), are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” The goal of impact investing is to use the market to correct and address some of society’s most intractable problems. Impact investing combines traditional investment vehicles with philanthropy motivation, breaking with decades of long-held beliefs of shareholder primacy.
In addition, impact investing continues to gain traction among a wide range of investors including high-net-worth individuals, private foundations, financial institutions, fund managers and more. A recent report by the Forum for Sustainable and Responsible Investment estimates that in 2018, “$12 trillion was invested in socially responsible investment funds.” The surge in impact investing can be attributed in part to the distress in corporate America and to millennials’ demand for a more equitable society. The Report’s Executive Summary further discloses that “$8.6 trillion of the assets, or 74%, were managed on behalf of institutional investors and $3.0 trillion were managed on behalf of individual investors.”
Investors are realizing that impact investing can provide a wide range of benefits for all parties involved. Investors can play a fundamental role in shaping the future of our planet, by eradicating poverty, expanding access to education and healthcare, promoting peace, decreasing the wage gap and much more. Additionally, investors can also receive market-rate returns while changing the culture of investing, allowing them to “do well while doing good”, as the saying goes. Vital Capital Fund, for instance, serves as a leading impact investor whose impact-driven investing has improved the lives of millions of individuals in underrepresented communities while delivering market-rate, risk-adjusted returns to their investors. A private equity fund with about $350 million in assets, Vital Capital has invested in education, healthcare, infrastructure, housing projects in sub-Saharan Africa and collaborating up with Luanda Medical Center in Angola and WaterHealth International. Vital Capital’s success is not unique. There are other companies thriving in the impact investment industry.
If you are an investor looking to get started on social impact investing, here are three things you should keep in mind.
Define your goals. It is important to articulate clear and concise goals. Consider whether your primary objective is to make an impact or generate returns. Also, set out what you consider to be your own definition of a successful impact. Finally, decide how much you are comfortable investing and how much risk you are willing to bear.
Identify a business that has the potential to promote changes. Not all businesses are created equal. Spend time researching your target business to ensure that it meets your impact requirements while still providing market rates of return. Make sure that the company is dedicated and invested in achieving the same meaningful impact you anticipate so that the business mission aligns with your social goals. Consider looking at the financial information of the business as compared with other companies in that same industry.
Choose an evaluation metric that works for the particular company. Providing data metrics continues to be an important part of the value proposition of the company. For years, many investors shied away from impact investing because they lacked the tools and expertise to properly evaluate their impact. However, over the years, there has been a proliferation of metrics to help investors best evaluate the environmental, social, and corporate governance of a company. The GIIN, for instance, is a nonprofit advocacy group that has prepared the IRIS rating with the objective of creating a commonly-used method to help investors know which metrics to track to determine whether a particular issue has been resolved. The system permits investors to measure and manage their impact by recommending core sets of metrics with which investors can use to deliver against impact strategies for different fields. The Global Impact Investing Rating System is another metric that evaluates the investment and the quality of the funds. It is focused on the impact performance of a business, and uses a cross-geographic methodology that provides transparent and reliable data. Whatever metric you choose, determine whether the business is successful in meeting its intended goals by scrutinizing the data the business presents to each investor.
Although impact investing requires a little more researching and legwork than your traditional investment, the rewards are worthwhile for investors. By following the three recommendations listed above, investors can be better agents of social change while reaping high monetary returns on investment— and, indeed, do well, while doing plenty of good for society.