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How Does Impact Investment Balance Financial Returns and Social Outcomes?

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Written by: Nathan William

How do you define a successful business? Is it the one that performs well financially, or is it the one that has a positive impact on the society? Whether you realize it or not, the role of a business in the society has changed a lot over the past 40-50 years. Gone are the days when investors only cared about making money. Now, the majority of the businesses have adopted an alternate approach towards investments that focus on contributing something worthwhile to society and the environment as a whole, while earning a profit for the company.

This new approach towards investment, more accurately known as impact investment, aims to generate positive, measurable social and environmental impact alongside a financial return. It is possible to make impact investments in both emerging and developed markets, where the target of the return income can be anything from below market to the current market rate, depending on the strategic goals of the investor.

Interestingly the growing market for impact investment allows the investors to address some of the most talked about challenges in the sectors, including renewable energy, sustainable agriculture, conservation, microfinance, and affordable and accessible basic services like education, housing and healthcare. Now let’s find out how impact investment drives a change in the society.

The context of impact investments

Over 230 billion dollars are invested by the fund managers in impact investments worldwide. Interestingly, half of that fund is invested in emerging markets, believing that it may generate massive revenues while driving positive outcomes for the underprivileged people in the society. In fact, investors are considering investing in innovative projects with lower financial returns but with the potential to initiate a major change.

It’s a great thing for society that a lot of impact investors are now interested in making investments that serve towards achieving Sustainable Development Goals (SDGs). However, only a handful of sectors have seen significant benefits. Housing, finance and energy accounted for the major portion of all the investments in 2015, where health, education, and sanitation and hygiene received only a small proportion of the investments.

How companies are strategizing their impact investments?

Several investment management companies have been offering mutual funds that invest selectively on the organizations that are not just responsible but also environmentally and socially driven. Investing in microfinance loan is also getting a lot of attention these days. Such loans can help individuals with limited access to capital, begin a new venture.

Interestingly, the businesses that are initially funded by microfinance loans, are delivering great returns to the investors lately. In fact, in some cases, impact investment (through microfinance) has been able to generate more revenues for the investors than the regular investments in the broader market.

Assignmenthelp.us, which is an online company funded through microfinance, is doing pretty well when it comes to profit making. Alvin Matthews, who works for Assignmenthelp.us, says “Microfinancing helped us kick things off when we were only a team of 5 members wanting to deliver assignment help to students. Now we are not only making monetary profits but also doing our part in providing academic assistance to the students”.

Goldman Sachs is a good example of an impact investor that has made headlines for its impact funding strategy. In 2017, Goldman Sachs rolled out its Social Impact Fund, which aims to provide monetary support towards physical, economic and social rehabilitation of underprivileged communities in the society. The primary agenda of this fund is to address social changes and to introduce new sources of private capital to facilitate enough scope for social impact while offering the investors a significant amount of profit.

Related: Top 4 Themes in Impact Investing Right Now

Related: What Exactly is Impact Investing

How the investment choices are changing?

In the past few years, the demand for impact investment products has been on the rise, making it a part of the mainstream. In fact, Goldman Sachs is not the only investment company that has made a significant effort in this impact investment industry. Financial institutions like Morgan Stanley and Merrill Lynch have also shown their interests in initiating impact investing platforms.

The impact of investment initiatives like the GS Social Impact Fund is interestingly turning into profitable options for the investors. While spearheading social changes remains one of the major objectives of these impact investment initiatives, higher ROIs are motivating more and more investors to try their luck in this area of investments.

A study that has surveyed 208 impact investors reveals that 91% of the participants reportedly received favorable outcomes from their impact investments. In fact, those investors are also reportedly willing to increase the amount of their investment by 17 percent in 2018, which suggests that the amount of investment may grow to 25.9 billion dollars.

What is the future of impact investment?

Today’s young investors are showing a keen interest in making investments on the projects, funds and organizations that are in line with their own values and beliefs. For them, impact investment is something that not just matches with their ideologies, but also offers the opportunity to invest for future security.

It is great to see that these new-age investors are working towards making a social impact on the world with their investment choices. What’s more commendable is that they also focus on how their investments can also generate profits. Usually, social impact funds demonstrate a lower level of volatility than the non-impact funds.

Currently, investors are limiting their investments in areas like healthcare, social developments and environmental causes. Offering monetary grants is not really a popular investment option for the investors, which also indicates the fact that they are more concerned about meeting corporate social responsibilities. In fact, it also allows investors to measure concrete outcomes while generating higher revenues.

Conclusion:

As mentioned, the number of investors willing to make a contribution to the area of impact investment is rising rapidly with years. And there’s nothing to complain about. Their investment decisions are offering competitive returns while serving the basic idea of helping society to achieve SDGs.  Yes, a lot of work is still required. But the way things are moving, we can expect to see a better tomorrow as the new breed of socially aware investors take the center stage.

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