Society, the economy and culture have undergone enormous transformations in recent years. The way we think, communicate and consume has little resemblance to how it was a few decades ago. This has also had consequences for the way we invest and the motivations that drive us to do so. Impact investment has made headway as a form of investment that combines the search for economic benefits for the investor with the desire to contribute to the ecological transition of the productive fabric or to invest in projects that are beneficial to society.
Such is its growth that the Global Impact Investing Network estimates that the size of the impact investment market now exceeds the figure of 1 trillion dollars worldwide. However, it is concentrated in North America and Europe.
With the 2030 Agenda at the center of all eyes and the goal of reaching 0 net CO2 emissions by 2050, impact investing is set to become a strategic issue in the coming decades and to channel the desires of millions of people to contribute with their money to make an ecological transition that, in addition, does not generate negative consequences in some layers of society.
In today’s article, we will analyze what impact investing is and how it can generate benefits for investors and society.
What is impact investing?
A type of financial service in which investors put their money into business projects whose mission is to impact society, the economy and the environment positively. All this without renouncing to obtain profitability for contracting these investment services.
This definition allows us to observe the two keys to impact investing:
- It is an investment, not a donation. People who opt for impact investing do not do so out of mere philanthropy, nor are they motivated by pure altruism. Instead, they want to combine a return on their money with the possibility of supporting projects that benefit society. Thus, impact investing, unlike philanthropy, does not renounce profitability when financing projects.
- It seeks to generate an impact on the real economy and society. As a result, the ability to measure this impact is crucial. Unlike investments that take into account environmental, social and governance (ESG) criteria, in impact investing, it is essential to observe the direct impact of the investment on the achievement of social or ecological objectives. In other words, more is needed to invest in environmentally responsible companies; the investment must result in a measurable and verifiable improvement.
The European regulatory framework: Sustainability in financial services
Because of the growing importance of impact investment and socially responsible investment, the EU has legislated in this area to systematize information on sustainable investments.
This area is regulated by Regulation 2019/2088 on the disclosure of information related to sustainability in the financial services sector.
Article 9 of this regulation focuses on sustainable investments, stipulating what pre-contractual information must be provided to investors for them to decide whether or not to contract these financial services.
In essence, this article stresses the use of indices to assess the sustainability of the impact generated by investments, as well as the duty to clearly explain how the objectives of sustainable investments are to be achieved.
The leading role of impact investment funds
When channeling impact investments, venture capital funds focused on impact, and sustainable investments have become very important. These funds aim to finance companies and enterprises whose actions have a positive impact on society and the environment.
Creating specific impact investment funds has been a milestone in extending this type of financial service. However, they have an obvious problem: they are open to only some types of investors, but only large investors can access them, leaving small savers out of the impact investment arena.
The role that alternative financing arrangements can play
Alternative financing methods such as crowd equity or crowdlending can help make impact investing accessible to all investors, even if their investment capacity is limited.
Those companies and business projects that carry out activities that positively impact society and ecology and contribute to the necessary ecological transition should bet on alternative financing as a way to obtain liquidity through impact investment.
Beyond trying to seduce impact investment funds, the ability to disseminate what they do among many small and medium-sized investors predisposed to invest in this type of companies is fundamental. Why?
To grow and consolidate in a highly competitive market, funding is essential. And the more avenues for financing these companies have at their disposal, the greater their capacity to have the necessary economic resources to be viable and to combine a positive impact on society with the central objective of any company: to make a profit.
The desire to contribute to building a fairer world
The ecological transition is humanity’s most ambitious task in the coming decades. For this reason, the participation of public administrations, large companies, and society are essential. We must all pull together, and small investors can also play a crucial role in transforming how we produce, consume and live.
We should start from this reality and consider that millions of people are willing to invest their money to promote transformative and sustainable business projects. In that case, we find ourselves in a scenario where it is essential to find ways to channel the desires of potential investors.
Alternative financing can play a transcendental role in this matter. Through this alternative mode of financing to the traditional financial system, we can connect small savers who want to bet on impact investing and companies whose mission is to positively impact our planet and improve our society.
The Four Rs of impact investing: Return, Risk, Responsibility, Results
When talking about traditional investing, reference is often made to two words beginning with R: return and risk. Return is the economic benefit achieved by the person or entity investing their money. Risk is the level of uncertainty assumed when investing an amount of money in a financial service.
These traditional Rs are still present in impact investing. As noted earlier, these investments seek a return, unlike philanthropy or donations. Like traditional investments, they are also associated with risk. But, contrary to what one might think, neither the return has to be lower nor the risk higher. The difference between traditional investment products and impact investing lies not in these two Rs but in two others that we could add to the equation.
First, there would be accountability. In traditional investing, profitability and risk were the two factors that came into play when deciding whether or not to hire a certain financial service.
In impact investing, however, the investor is not only motivated by these issues but also by social responsibility. They want their money to be used to strengthen projects that positively impact society.
Secondly, we would find ourselves with the R for the result. As we have already indicated, impact investing seeks to achieve a result that can be reliably observed. At the risk of being redundant, this type of investment seeks to act as a lever that pushes a company to achieve a real social and ecological impact. In other words, there must be a cause/effect relationship between the investment and the result obtained.
Making money by investing in projects that benefit society and the planet
Thus, if a person makes an impact investment in a company that is dedicated to installing alternative energies in rural areas to encourage self-consumption of electricity and hire people in those areas, the results obtained by the company both in terms of energy self-sufficiency and in terms of hiring must be a constable.
Every day more and more people are willing to invest their money to help build a more sustainable, productive fabric and boost local economies. Interesting projects are emerging daily, with good ideas that may be economically viable. Still, they need to obtain financial resources to get started, leap to the next level or expand.
Impact investing response to the desires of socially committed investors who want to take an active role in the ecological transition and to the needs of socially and environmentally responsible companies.
In addition, impact investing achieves a double bottom line. Investors get a return for their money and the satisfaction of contributing to changing the world. And companies get the financing they need to carry out their plans. As the saying goes: it’s a win-win.