Impact investments are the investments seeking to generate a positive and measurable impact on society and the environment, along with the financial return. It includes investments that define measurable impact alongside financial returns.
Impact investors look for investments that could offset the negative impact and generate a positive impact. A positive impact could include generating jobs, serving low-income consumers, accessible and affordable - healthcare, housing, and education.
Impact investing is relatively less popular compared to Environment, Social & Governance (ESG), Corporate Social Responsibility (CSR) and Socially Responsible Investing (SRI). The differentiating factor in impact investing is the intention of financial return along with constructive outcomes.
Impact investing can be undertaken in any market, be it developed markets or developing or emerging markets. The avenue for investments could depend on the expected return of the impact investors.
Impact investment markets provide funding to the sectors solving today’s challenges, including renewable energy, conservation, sustainable agriculture, housing, financial services, education, and healthcare.
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Positive impact and return: Investors seek to create a positive impact on society and the environment, thus providing capital to overcome any challenges arising from them. An investor would require capital seeker to set financial and impact goals.
An impact investor is also responsible for the investment thesis, which defines the strategies used to realise financial and impact goals. It becomes imperative for investors to articulate the optimal and scalable impact and financial return.
Evidence and data: Impact investors use extensive quantitative and qualitative impact data and evidence to support investment thesis. Extensive research allows setting targets about the investment contribution.
It also helps to design investment strategies based on the solutions to address the needs and understand the potential negative impacts. Evidence and data also enable to improve capacity to undertake impact analysis.
Impact outcomes: It is essential to measure the performance for effective decision-making on investments that are made to address the challenges in society and the environment. Managing impact performance is crucial for potential investments.
It includes evaluating risks to achieve the stated goals and formulation of risk-mitigation strategies. Evaluating impact performance also seeks to mitigate the unintended consequence of the actions undertaken in the past.
Increasing impact investing: Impact investors also seek to improve the impact of investing by enabling more investors to consider impact investing. It can include sharing of best practices, learning, evidence, and data.
Impact investing contradicts the conventional view that social and environmental issue could be handled by means of donations and philanthropy. It also challenges the traditional view that investments are made with a single intention of financial return.
It defies the logic and promotes investing in a way that seeks to deliver societal and environmental change alongside financial returns. The conventional methods to bring positive changes to the society and environment have resulted in wealthy people evading tax through donations and philanthropy.
Enterprise and entrepreneurs are now looking to tackle the complex challenges faced by society and the environment in the age of global warming and rapidly depleting natural resources. Impact investing provides capital to such enterprises and entrepreneurs.
The market perception about impact investing has been that superior returns cannot be realised through impact investing compared to non-impact investments. Impact investing initially became popular among philanthropists and charities, who have the appetite to accept below-par returns compared to the market.
International Financial Corporation (IFC) published a report on impact investing in April 2019. It was noted the IFC’s equity impact investments had delivered similar or better returns than the Morgan Stanley Capital International (MSCI) Emerging Market Index between 1988 and 2016.
There remains a lack of clarity among market participants on how the investment would deliver the impact on society and environment. Impact investing industry also needs to formulate common standards to manage the impact investment portfolio.
Investment managers have a set of standards that are applied for asset selection for investment. Similarly, impact investor should develop appropriate measurement systems to monitor the performance of targets.
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Vital Capital is a private equity firm engaged in impact investments. It was established in 2011 and is focused on sub-Saharan Africa. Vital Capital has observed that trade-off between commercial viability and impact of the project is not necessary.
It engages with investors, portfolio companies, international organisations, impact investment funds, banks to deliver better outcomes. Vital Capital believes that achieving returns and having an impact on the society and environment could go hand-in-hand.
361 Infrastructure Partners
361 Infrastructure Partners is sustainable infrastructure platform on a mission to resolve infrastructure challenges and impacting environment and society. It seeks to invest in social infrastructure projects that empower public and private entities.
361 Infrastructure Partners believe that upgrading modern systems allow for safeguarding overall public health and safety, while also reduce CO2 emissions. Its goals are to enable impact-driven entrepreneurs to take a leadership position in solving the challenges faced by the environment and society.
In 2012, JP Morgan and Bill & Melinda Gates Foundation established Global Health Investment Fund (GHIF), which sought to construct an impact investing portfolio of drug, vaccine, medical device, diagnostics to address public health challenges.
After incubating under GHIF, Adjuvant Capital is now an independent investment platform. It seeks to drive meaningful change in the public health of low and middle-income countries, while also chasing financial returns.
It focuses on reproductive and sexual health, maternal and new-born challenges, improving nutrition in the undernourished nations, high-burden health challenges, emerging infectious disease such as pandemic threats.
Aqua-Spark is an investment fund which emphasis on sustainable aquaculture businesses worldwide. It invests in small & medium projects which are focussing towards the production of safe and accessible aquatic life.
Aqua-Spark does not seek exits early and look for entrepreneurs seeking to build scale for the future. They prefer entrepreneurs who believe in the business opportunity and contribute food security and environment challenges over the long term.
Investors should be practical and socially responsible in choosing companies that fulfil their views along with giving due respect to human rights, environmental protection and so on. So be A Smart Investor and choose wisely.