Companies are turning up the heat on impact investing and the buzz around this fairly new concept is making an environmental and social impact while creating a great return on investment. Impact investments are made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.
It challenges the longtime notion that social and environmental issues are exclusive to philanthropies and nonprofit organizations. The GIIN (Global Impact Investing Network) states, “The growing impact investment market provides capital to address the world’s most pressing challenges in the sectors such as sustainable agriculture, renewable energy, conservation, micro-finance, and affordable and accessible basic services including housing, healthcare, and education.”
This form of investing is often used synonymously with ESG (environmental, social, and governance) investing. However, impact investing has become its own refined practice that focuses specifically on companies and organization that aid the environment and sustainability. “While ESG investing is the consideration of environmental, social and governance aspects of companies, alongside the various other characteristics money managers use to compare companies, Impact investing describes the intentional investment in a company, pursued specifically to fashion positive impact on the environment and/or society,” says Gitterman Wealth. Therefore, impact investing works alongside ESG criteria to not only influence environmental and sustainable practices but drive a long-term profit.
Impact Investing on the Rise
The demand for impact investing is growing fast. Forbes reports, “Impact investing could be one of the most important social innovations in our lifetimes, leveraging the massive power of the capital markets to a higher purpose than maximizing returns for shareholders.” According to the GIIN, in 2017 an estimated $139.9 billion was invested in impact investments. This exponential growth is up from $10.6 billion in 2014. CNN Money reports that Michael Baldinger, Head of USB Asset Management’s sustainable and impact investment said, “It’s a $250 billion market and it’s growing fast. It might really be a game changer for the finance industry.”
Impact investing is far from an overnight phenomenon. It has taken Wall Street investors quite a while to catch up and become believers in its bottom line. Baldinger goes on to say, “In the past you sold products to your client, now you empower your client to create a desired impact. As an industry we’ve had to rethink everything we do…”. The tides are beginning to turn as larger corporations brazenly enter the market and create teams catering specifically to impact investing. BlackRock and Goldman Sachs are pioneering the entrance of big finance into impact investing. BlackRock, which manages $5 trillion in assets, recently brought on Deborah Winshel, the former CFO of the Metropolitan Museum of Art and the COO of the Robin Hood Foundation, to head a new impact investment initiative, CNN Money reports. Dina Habib Powell heads Goldman Sach’s Impact Investing and is president of the investment bank’s foundation. Goldman Sachs also recently committed $50 million to provide loans to female entrepreneurs.
In Fact, impact investing found its roots and ultimate force predominantly with women and millennials. “So far, women and millennials have shown the most willingness to experiment with impact investing,” reports CNBC. “Both groups have shown they are willing to sacrifice percentage points from their returns to invest in companies and projects that do good in the world.” Bank of America’s wealth investments management business says that 76% of millennials see investment decisions as a way to express their social, political and environmental values. “When three-quarters of a population are saying ‘this is important,’ that’s huge,” said Jackie VanderBrug, a managing director at U.S. Trust. Jean Case, chairman of the National Geographic Society and CEO of The Case Foundation feels that the next generation will be the driving force in impact investing. Fortune states, “Impact investing, she said, is a way for funds and corporations to attract and retain the next generation of talent- who don’t just want to make money but also hope to make a difference in the world.”
Good Governance Makes for a Good Investment
But what makes an impact investment a worthy bet? The answer lies in corporate governance. There is oftentimes a greater risk with placing a hefty sum into a company or organization that serves the impoverished or environmentally desolate communities while attempting to create a profit. “Governance is the structure with which the vision, values and mission of the social enterprise becomes institutionalized into strategic decision-making,” says Huffington Post. When investment companies are looking for valuable companies to bet on, one of their top priorities is the strong leadership and guidance of the board. By establishing a strong corporate governance presence in a company, this lets the impact investors know that their stakeholders’ concerns are prioritized.
Well-governed companies place transparency at the forefront of their practices. “They may disclose their political spending and lobbying, so customers and investors know how the company may be trying to influence legislation,” says Forbes. The balance of power is also a characteristic of corporate governance best practices for impact investing. Independent boards are often diverse and work to uphold the company’s vision and viewpoints of shareholders. Forbes also reports that impact investments can use diversity, ethical business practices, say on pay, and data security to make a difference to their investors.
Investing in a Better Future
There is still work to be done to make impact investing a mainstream enterprise. However, with big-name investors such as BlackRock and Goldman Sachs entering the race, the hope is there for more lucrative investments. Impact investing has also put a spotlight on companies that prove these investments on the environment and sustainable practices are worthwhile. This transparency is key to the growth of impact investments. Barclays, another major bank heading impact investing says, “Our interest is not to add impact products to a shelf of investments. Once you start seeing the world that way, it becomes obvious and you ask, ‘why not.’” It seems that the future of impact investments is truly driven by new generations willing to make the leap into a creating a better world.
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