Social impact investing: a beginner’s guide
|What is social impact investing?|
|Social impact investing vs. ESG|
|How does social impact investing work|
|Social impact investing examples|
It’s true — all investors care about are those sweet, sweet returns. But what if you could do good and make money? With the rise of sustainable investing, many nonprofits have partnered together with money managers and investment banks to better society in a measurable way through investing. To be precise, what they’re doing is investing in companies, organizations, funds, or projects that can bring about a positive change in society — be it through quality jobs, women’s empowerment, environmental sustainability or something else — all the while generating high returns. That’s the essence of social impact investing. Want to take a closer look? YALLAH.
What is social impact investing?
Although the concept of impact investing wasn’t formally introduced until 2007, the activity itself has been evolving for quite some time.
As we said in the beginning, the main objective of social impact investing is to serve society positively. Its secondary purpose, however, is to mitigate the negative societal impacts of commercial activities. That’s why some people see impact investing as a natural progression from philanthropy.
Impact investing is another arm of socially responsible investing, or SRI, right along with Environmental, social, and governance, AKA ESG. While SRI focuses on companies that support environmental sustainability, social justice, and corporate integrity, impact investing focuses more on making a profit while creating that positive impact. Its primary goal is to invest in firms or organizations that better our society in some way while still generating those sweet, sweet returns.
Social impact investing vs. ESG
There’s a lot of confusion about the terminology used in these branches of sustainable investing, but not to stress. Here’s a quick breakdown of the few most used terms that will explain the essence:
- Environmental, social, and governance (ESG) assesses a company’s environmental, social, and governance standards with financial indicators and then urges them to act responsibly.
- Socially responsible investing (SRI) focuses on investing in companies and organizations that embody ethical and socially aware ideals, such as sustainability, consumer protection, human rights, and more.
- In comparison, Social impact investing helps a firm or organization rake up strong returns while making a measurable contribution in areas like renewable energy, education, microfinance, agriculture, and healthcare (more on these later). By doing that, it SII also drives economic development while contributing socially.
Some of the social impact investors include fund managers, development finance solutions, diversified financial institutions or banks, pension funds, insurance companies, pension funds and insurance companies. In another bracket, we have family offices, individual investors, and even NGOs.
How does social impact investing work
If the investment is in the form of a loan, the rate of return is typically fixed. This indicates that the money will be reimbursed at an agreed-upon rate regardless of the performance of the organization receiving the loan, whether it does very well or very poorly.
If you want to dig a little deeper, here are a few key terms you need to know:
Social investors: this is what we call people who decide to take the route of social impact investing and make it happen.
Asset owners: these are people who own an asset (the money) they invest, so it’ll give them the expected returns years down the line.
Capital or principal: this is the initial money invested for the sake of returns.
Interest/return: you guessed it – this refers to the growth on top of the capital.
Fund managers: this is what we call people who manage the funds of asset owners for a fee.
There’s a growing list of initiatives that fall under the umbrella of social impact investing, like those aimed at expanding educational opportunities, ensuring reliable supplies of water and medical care, providing low-cost housing, promoting the use of renewable energy, and so on.
Other activities include:
- Education, energy, water, or healthcare.
- Affordable housing.
- Renewable energy, and micro-finance.
Social impact investing examples
Impact investors support various industries — renewable energy, electric cars, microfinance, and sustainable agriculture. Here are some examples of social impact investing below:
- Based in Maryland, ImpactAssets introduced a yearly list of 50 investment managers called the IA 50. This yearly database includes impact investors, family offices, institutional investors and organizations dedicated to making a positive social and environmental impact.
- With headquarters in New York, Goldman Sachs introduced its GS Social Impact Fund dedicated to disadvantaged communities across America. The fund tackles social challenges and mobilizes private capital into the social impact area while raking up gains.
- Fresh Ventures is a program based in the Netherlands that helps establish new businesses as a startup studio. They collaborate with seasoned professionals and businesspeople to start companies to address systemic difficulties within the food chain.
- Also based in the Netherlands, the Good Fashion Fund helps manufacturers and business owners use certain technologies to improve the adverse effects that come with making apparel. That means using materials that are safe and can be recycled, using clean energy and less of it, as well as creating fair jobs and growth in the fashion industry.
Social impact investing can generate very high returns for its investors. According to Investopedia, over 88% of impact investors reported being happy with their yields! Social impact’s popularity is growing, and an even higher rate of return could come with that. And because there’s such a massive demand for ecologically friendly goods and services, equal salaries, renewable energy, etc., some are even calling social impact investing the future. We at amana believe that the best part of social impact investing is that it makes a positive contribution — a rare find in finance. So, why not explore this socially responsible avenue through your business?