What comes to your mind first as far as investing in the context of the financial sector? It is likely that people associate making an investment with matters like generating profit, high rate of return, risk and capital management, etc. However, as the notion of corporate social responsibility (CSR) is perceived to be much more crucial in recent decades, the way some people make investments evolved around it as well. Although being ethical is generally considered to be contradicting with pursuing high-profit margins, concepts such as sustainable finance, socially responsible investment and impact investing have become more and more popular in recent years. Furthermore, there is now a variety of products on the financial markets in which the fund managers possessed the philosophy of being socially responsible. So it is not only about the financial gains anymore, but also the social impacts your investment decisions can potentially generate. How exactly can you put these concepts into practices, and is it possible for products like this to ever become the mainstreams in the financial markets?
The banking industry is without a doubt in a critical position to contribute to the transformation of the economy to a greener and more inclusive one. One example is the United Nations Environment Programme — Finance Initiative (UNEP FI), originated in 1992. The UNEP incorporates with around 200 institutions in the global financial sector and together they work toward the goal of investing more social responsibly or even actively support the business that generates positive impact to the society. For instance, the investment areas such as renewable energy, sustainable housing, and healthcare that contribute positively to the society and the environment should be favored. On the other hand, people should reduce the number of investments made in the industries that are environmental damaging or toxic to human health; such as tobacco, alcohol as well as the non-renewable energy industry. In October 2015, the members of the UNEP FI released the Positive Impact Manifesto, which calls for a new financing paradigm that intends to set guidelines for financiers, investors and auditors together contributing to get a more sustainable society.
However, it is more easily desired than achieved. The concept of impact investing is still fairly new to most investors and barely any higher business education institution puts serious attention on educating students on how to incorporate it into the traditional investing knowledge that ultimately only takes the maximization of profit into account. At least, as a student major in finance myself, I only came across impact investing in one investment portfolio theory lecture, and apparently, it was not considered desirable if you are a ‘rational’ investor. This is why I found this topic particularly important to address — we cannot disagree that business and capital markets can be a tremendous force for positive social change, yet (potential) investors and financiers are pretty uneducated or ignorant of how it can be done in practice. First of all, let’s define what are impact investments. The Global Impact Investing Network (GIIN) defined the term as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”. Therefore, there is a minor difference between impact investments and socially responsible investments in the sense that the former actively supported companies that possess explicit intent to have a social impact via their business model, while the later passively avoid investing in industries that create negative social impacts. Some may view impact investments as a grant instead of an “actual” investments —well, it also has a range of expected risk-adjusted return, and there is something more than just monetary return: the actual social impact that your investment creates. It, therefore, required the investors to think along three dimensions: return, impact, and risk. Getting your arms around all three variables simultaneously is challenging. As an impact investor, you must answer critical questions on how much financial return you expect, how much social impact you seek and how much risk you will accept in the pursuit of financial and social return.
It is not impossible to obtain a satisfying amount of return and contribute positively to the society at the same time. With a set of criteria in mind of what your goals are as an impact investor and then filtered out the financial products and focused sectors that best fitted you. There are private funds for institutional investors, for example, Equilibrium Capital is a fund that pursues the strategy that targeting investments with sustainable business models with an intrinsic focus on a product or service that delivers social impact. If the businesses succeed they can deliver financial and social returns at scale. There is also a wide range of financial security for you to pick from as an individual investor, most of them are fairly liquid and can be traded just like any other stocks. There are some examples: SerenityShares Investments’ impact ETF is now trading on NYSE, iShares Sustainable MSCI Global Impact ETF (MPCT) that tracks the newly constructed MSCI ACWI Sustainable Impact Index which aimed to invest in companies that obtain the majority of their revenue from easing major world’s environmental/social challenges such as energy efficiency, sustainable water, sanitation, nutrition, and education. If you want to focus specifically on certain issues, there are also ETFs such as gender diversity index ETF, low carbon target ETF, clean energy ETF etc..
Feeling bold and want to make a positive impact beyond your portfolio after reading this article? Do your research and give impact investing a try!