Can you be an ethical investor and still turn a profit? This question sits at the heart of impact investing. Ideally, impact investing funds create a win-win situation. The money is used to provide funding for worthy causes, while investors earn profit at the same time. So, what is impact investing, and is it actually profitable? Here’s what you need to know.
What is impact investing?
Impact investing refers to any investments made in funds, non-profit organisations, or businesses designed to generate both a positive social impact as well as a positive financial return. In addition to social impact investing, there’s also environmental impact investing for industries like renewable energy and sustainable agriculture.
Within this framework, impact investments can apply to a wide range of different markets and asset classes. The overall goal is to use capital to make a positive social or environmental impact while still reaping financial reward.
In many ways, it’s tied to the idea of corporate social responsibility (CSR), or the idea that businesses bear some responsibility for mitigating any of their negative impacts on the environmental and social sectors. This might mean anything from investing in community-minded organisations to providing capital to start-ups with a focus on developing cleaner, greener technology.
Types of impact investing
In most cases, financial institutions like hedge funds and banks take on impact investing. However, you’ll also see angel investors, online investment platforms and microfinance loan providers getting involved.
This category of investing covers many types of financial instrument and instrument vehicle, particularly in the following areas:
Although impact investing is closely related to socially responsible investing (SRI), it works to actively create positive impact, rather than simply avoid doing harm. For example, socially responsible investors might avoid putting their money in funds that include GMOs or producers of harmful products like cigarettes. Impact investing goes a step further to actively invest in companies dedicated to making positive changes in the world.
Are impact investing funds profitable?
Now that we’ve outlined what’s involved with impact investing, it’s time to turn to the main question. Are they profitable?
There’s been a long-held view that social impact investing is best left to nongovernmental organisations (NGOs) who provide valuable social services. Many investors worry that the type of funding provided to non-profits, for example, is difficult to scale up and generate adequate returns. Impact investing in emerging markets, which tend to be volatile, is also considered to be higher in risk.
However, in looking at financial data you can see that impact investments can be both sustainable and profitable. For example, according to a study published in McKinsey Quarterly, the median internal rate of return of impact investments in India was 10 percent, with a top third yielding median returns of 34 percent. These investments covered many of the sectors we’ve mentioned above, including clean energy and agriculture as well as healthcare and education. Of these sectors, the top performing ones were in financial inclusion, clean energy, and agriculture.
According to a 2018 survey from the Global Impact Investing Network, impact investing assets doubled from one year to the next, up to $228 billion. This growth is tipped to continue, which means now may be a good time to buy in.
The future of impact investing
This type of investment strategy is increasingly going mainstream, which means you have more outlets than ever. Major players like Goldman Sachs have joined in by creating the GS Social Impact Fund. This social impact investing fund is dedicated to addressing inequality in the U.S. by investing in affordable housing, education, healthcare facilities, and small businesses from disadvantaged communities.
The Global Impact Investing Network is another prime example, working with large institutions like the Rockefeller Foundation, Bank of America, and JP Morgan Chase and Co. to offer investors social impact bonds. These are designed to minimise the risk associated with impact investing. If you’re looking for a way to slowly get involved and diversify your portfolio, the Global Impact Investing Network is a good start.
Although impact investing still skews more toward institutional investors and wealthy individuals, the growth of funds opens up the playing field for smaller-scale investors to get started as well.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.