Impact investing: Is it for you?

If you are an investor who is interested in directing capital toward ventures that will yield financial returns while also contributing to social and environmental outcomes, then impact investment may be for you.

What Is Impact Investing?

Impact investment is socially responsible investing (SRI) or environmental, social, and governance (ESG) investing. It is simply an investment strategy that investors can utilise to align their investments with their personal and philanthropic values while earning yields as they would from any other type of investment. It can be achieved through investment in areas such as health care, education, clean and renewable energy, and agriculture, just to name a few. Notably, impact investments target a range of returns from below-market to above-market, depending on the circumstances, by placing capital in businesses, non-profits, and funds that can harness the positive power of enterprise. If you are passionate about reducing the use of fossil fuels, protecting the environment, or supporting other social goods, then you might decide to invest in ESG funds focused on companies committed to these causes or choose to directly invest in the companies.

Examples Of Impact Investing

The term impact investing is a relatively new one, coined first around 2007; however, it has been practised for some time before and is often considered somewhat of an extension of philanthropy. Businessman Mark Cuban (of Shark Tank fame) is notorious for investing in mission-driven companies, especially those led by women, minorities, and veterans. He and fellow impact investor tennis icon Serena Williams have funded Mahmee — a care management platform for new mothers whose goal is to reduce maternal mortality by providing pre and post-natal health care. Global impact investment firms include BlueEarth Capital, Ceniarth, Calvert Impact Capital, and the Community Development Venture Capital Alliance. These firms are recognised for investing their capital and expertise in marginalised or vulnerable communities and countries facing social and economic challenges. Through this partnership their collective mission is to improve livelihoods and generate a measurable impact that produces sustainable financial returns.

Approaches To Impact Investing

Yes, Cuban and Williams are high-net-worth individuals, so you might be tempted to think impact investment is beyond your grasp. Moreover, the rise of this kind of investing has indeed largely been driven by interest among the wealthy, affluent, and primarily women. It is also true that the bulk of impact investing has been done by institutional investors. However, there is a seismic shift in who is participating in this kind of investing as these investments take the form of various asset classes, resulting in the number of SRI and ESG options growing. These changes have made it easier for individual investors to engage in SRI and ESG investing. Some of the common approaches to impact investing include:

1. Mutual funds, exchange-traded funds (ETFs), or impact bonds, which are good options if your funds are limited. Oftentimes these funds will include companies aligned with your values on environmental practices or human rights. Impact bonds are outcome-based financial instruments wherein investors provide upfront capital to fund social programmes or projects. Governments or social organisations repay investors if the project achieves predetermined social outcomes.

2. Thematic impact investing focuses on specific social or environmental themes. Investors can target areas such as renewable energy, clean technology, education, health care, gender equality, affordable housing, water conservation, and sustainable agriculture. By investing in companies and projects that directly address these themes, investors can support the advancement of specific causes they are passionate about.

3. Impact investing can also be done indirectly, meaning you avoid investing in companies whose values you disagree with. This approach incorporates ESG factors into the investment decision-making process. ESG integration involves considering a company's performance in areas like carbon emissions, labour practices, board diversity, and corporate governance. By avoiding investments in companies with poor ESG practices and prioritising those with strong ESG performance, impact investors can influence positive changes within corporations.

4. Lending to non-profits is also a kind of impact investment. Examples of this include a non-profit that will benefit the community by aiding small business owners with start-up capital, or a clean technology enterprise that benefits the environment. You can even invest in a bond issued by a company that wants to expand and provide additional beneficial employment.

That being said, there are some shortcomings such as the trade-offs between impact and returns, and limited investment opportunities. Striving for impact may sometimes require accepting lower financial returns compared to traditional investments. Consequently, balancing impact objectives with financial performance can be a delicate task. There is also the issue of limited investment opportunities. While the impact investing landscape is growing, there may still be limitations in certain regions or sectors, making it difficult for investors to find suitable opportunities that align with their impact objectives.

Nevertheless, impact investing is gaining momentum as investors increasingly recognise the importance of aligning their financial goals with social and environmental goals. As this form of investing becomes even more commonplace, you may want to dedicate a part of your portfolio to SRI or ESG. If you want to become a socially responsible investor, contact your investment advisor or company. They can advise you further on your options and help you invest your funds in assets that align with your values and the social and environmental impact you want.

Nadine Thomas, assistant vice-president – Private Wealth, NCB Capital Markets Limited (Photo: Paul Mullings)

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