How to look beyond financial returns with Impact Investing
We all want to make smart and sound investments; we all want to optimize and maximize our financial returns. More and more, we also realize how our investment decisions can (positively or negatively) impact our society and environment: if we support the right investments, we can seek financial, social and environmental returns. Contemporary societal trends are also dictating a shift in investor outlook; making money and achieving social returns are no longer viewed as mutually exclusive.
Luckily, the market offers a wide variety of products and services that meet such growing demand, alternatively labelled as Ethical investing, Socially Responsible Investment, Impact Investing, Responsible Finance, ESG, CSR, Double-bottom Line, Triple-bottom Line. The responsible investing space is indeed plagued by jargon and rhetoric. We hereby summarize key concepts.
The traditional definition of investing, the practice of maximizing financial returns on capital, makes no mention of the concept of non-financial returns: any positive externalities of an investment, typically social and environmental outcomes. The terms double (financial and social returns), and triple bottom line returns (financial, social and environmental) are frequently used. This approach proposes that a company’s success should be based on its behaviour regarding profit, people, and the planet.
Today’s common framework is ESG, which evaluates a company’s Environmental, Social and Corporate governance (ESG) characteristics. ESG measures an organization’s responsibility towards people and the planet and the quality of corporate leadership and ethical business practices.
When we invest, we can have 3 approaches based on social intent:
- “Do not measure” (conventional financial investing) – investments made with the primary goal of maximizing financial returns with no measurement of non-financial returns. These investments may have positive or negative social returns.
- “Do no harm” (socially responsible investing) – investments that seek a financial return while pursuing positive social outcomes. Socially responsible investments (SRIs) seek to avoid societal harm by excluding companies that are associated with harmful activities (negative screening) or by investing in companies with industry-leading CSR outcomes (positive screening).
- “Do good” (impact investing) – investments that target specific and measurable social returns while producing financial returns.
Responsible investing is the broadest category of investing that seeks to account for non-financial returns, including socially responsible investing and impact investing.
Impact investments (Impact Finance) are socially responsible investments that generate measurable social and environmental impact alongside a financial return.
Nowadays, Impact Investments are very accessible thanks to dedicated products.
a) If you check your bank or financial broker’s platform, you will surely find several Socially Responsible ETFs like the iShares Global clean energy UCITS or the UBS MSCI World Social Responsibility UCITS.
b) The recent Fintech wave has given birth to new interesting Impact Investment Platforms. For instance, I currently look for triple-bottom-line investments using a European Platform called Trine, and an African Platform called Sun Exchange. To know more about the services provided by these Impact Investments platforms, visit my Investing Platforms page.
c) There are also several other public and private entities providing investment opportunities in developed, emerging or frontier markets, promising different degrees of Impact. I am testing some of them through my consulting work. I will write more about it in future articles.