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Impact Investment
A basic goal of impact investing is to help reduce the negative effects of business activity on the social environment. Investors who use impact investing as a strategy consider a company's commitment to corporate social responsibility (CSR) or the sense of duty to positively serve society as a whole before they become involved with that company.
Re-orientation from Sustainable Investment to Impact Investment
Investors have significant influence over the social, environmental and economic challenges of societies, yet continue to operate within a market infrastructure and investment ecosystem where the incentives do not generally balance social, environmental and economic impact.
Regulators, asset owners, and managers increasingly ask:
Do sustainable investments contribute to a better world?
We used sustainable investments as a generic umbrella term for investments that incorporate
environmental, social, and governance (ESG) aspects in investment decisions.
it was a well-established term in popular market reports covering any type of investments that involve these aspects beyond mere risk-return considerations but this term has overlapping and varying interpretations.
Nowadays, there are several distinct strategies about how to use sustainability criteria within investment appraisals and sustainability-oriented indexes emerged in an era also focused on the interrelation between environmental, social, and financial performance, as well as the application of these approaches to large pools of assets.
So a clear shift towards considering actual impact is observable, especially after the Paris Agreement to limit global warming below 2 °C and the rise of the UN Sustainable Development Goals (SDGs)
So a clear shift towards considering actual impact is observable, especially after the Paris Agreement to limit global warming below 2 °C and the rise of the UN Sustainable Development Goals (SDGs)
So now sustainable investment is not a business case of sustainability, but it is a sustainability case of a business that asks for positive impacts.
What is Impact Investment?
Practitioners and academics have been using different terms to describe investments in the sustainability context.
The latest inflationary term is “impact investments” - investments that focus on real-world changes in terms of solving social challenges and/or mitigating ecological degradation. However, the term impact investment is often used interchangeably for any investment that incorporates environmental, social, and governance (ESG) aspects.
ESG is a construct for helping stakeholders understand how an organization manages risks and opportunities around sustainability issues. Impact, on the other hand, is forward-looking. It is a strategy used to define the types of investments an investor is targeting. so ESG is a framework. Impact investing
is a strategy.
is a strategy.
As a systematic approach to assessing an organization’s level of effectiveness in environmental, social, and governance performance, ESG can be used to mitigate risk by helping investors exclude or screen investments in companies that don’t adhere to pre-existing standards.
while ESG was ushered in by the public sector, impact investing evolved through efforts by the private sector. As a result, ESG attempts to serve as a guideline for public understanding of environmental, social, and governance factors, while the for-profit nature of impact serves as an incentive to act in favor of and drive capital toward these interests.
Examples of Impact Investing
- The Gates Foundation
One of the most well-known impact investment funds is the Bill & Melinda Gates Foundation, launched by the celebrated Windows pioneer with a total endowment of nearly $50 billion.
While most of the Gates Foundation is engaged in philanthropy, it also has a strategic investment fund with $2.5 billion under management, which is invested in ventures that align with the Foundation's goals of improving health, education, and gender equality.
As explained on the fund's website, the strategic investment fund supports "organizations or projects that benefit the world's poorest and are often overlooked by traditional investors."
- Soros Economic Development Fund
The Soros Economic Development Fund is part of the Open Society Foundations, launched by billionaire philanthropist George Soros. Soros has contributed about $18 billion to the Open Society Foundations, $90 million of which is actively invested in impact ventures. As the name implies, the Foundation seeks to support "open societies" by promoting democracy, legal reforms, higher education, and journalism, as well as other fields.
- The Ford Foundation
The Ford Foundation was launched in 1936 by Edsel and Henry Ford, with an initial endowment of $25,000. Today, it has one of the world's largest private endowments, with $16 billion under management.
Most of that money is given as grants to support causes aligned with the values of the foundation; however, in 2017 the Ford Foundation announced plans to invest $1 billion in business ventures aligned with their
mission.
mission.
SDS Impact Investment Evaluation
The term impact investing was first coined in 2007, but the practice was developed years earlier.
A basic goal of impact investing is to help reduce the negative effects of business activity on the social environment.
The opportunity for impact investments varies and investors may choose to put their money into developed economies. Impact investments span several industries including:
- Healthcare
- Education
- Energy, especially clean and renewable energy
- Agriculture
one of the core principles of impact investing is intentionality, or an explicit aim to generate measurable social or environmental benefit. Generally, this translates to an alignment with one or more of the UN Sustainable Development Goals as a cornerstone of the investment strategy. The results are targeted performance metrics that are measured against stated objectives, which ultimately hold investors accountable.
Indeed, intentionality is a first line of defense against impact-washing or false claims about an investment’s impact.
We will evaluate your company based on Impact Principles
The Operating Principles for Impact Management (the Impact Principles) have been developed by a group of asset owners, managers, and allocators to describe essential features of managing investments into companies or organizations with the intent to contribute to measurable positive social or environmental impact alongside financial returns.
PRINCIPLE 1:
Define strategic impact objective(s), consistent with the investment strategy.
PRINCIPLE 2:
Manage strategic impact on a portfolio basis.
PRINCIPLE 3:
Establish the Manager’s contribution to the achievement of impact.
PRINCIPLE 4:
Assess the expected impact of each investment, based on a systematic approach.
PRINCIPLE 5:
Assess, address, monitor, and manage potential negative impacts of each investment.
PRINCIPLE 6:
Monitor the progress of each investment in achieving impact against expectations and respond
appropriately.
appropriately.
PRINCIPLE 7:
Conduct exits considering the effect on sustained impact
.
.
PRINCIPLE 8:
Review, document, and improve decisions and processes based on the achievement of impact and lessons learned.
PRINCIPLE 9:
Publicly disclose alignment with the impact principles and provide regular independent verification of the alignment.