BTL 746 - Impact Investment

 

The Banking Tutor’s Lessons

BTL 746                                                                          21-01-2025

Impact Investment

Impact investing is the act of purposefully making investments that help achieve certain social and environmental benefits while generating financial returns.

It’s a broad term that refers to everything from investing in companies with an explicit mission aligned with your values to avoiding investing in companies that do not meet those criteria.

It can also be defined more expansively to include donating to nonprofits and projects that blend these charitable funds with investment capital to support larger or higher-risk projects that may not otherwise be financially viable.

This strategy is based on the idea that you can align your investments with your personal and philanthropic values while realizing financial returns.

Though the three terms – Impact Investment, Socially Responsible Investment and Environmental, social, and governance (ESG) investment seem to be similar, there are subtle differences. This will be explained in subsequent lessons. 

Types of Impact Investing

There are many different ways to invest for social or environmental impact or both. Here are a few common ones:

Invest in mutual funds, exchange-traded funds (ETFs) or bonds that choose companies that align with values that matter to you. Many of these funds select companies according to faith-based criteria, environmental practices or human rights.

Avoid investing in companies whose practices you disagree with. Some investors, for example, avoid “sin” stocks, like producers of alcohol, tobacco or weapons.

Make a charitable donation or a charitable grant to organizations or projects that blend charitable support with investment capital to support higher-risk projects that may not otherwise be financially viable. New initiatives to address a societal need may not be financially feasible or profitable until they can cross a threshold that lets them compete in the marketplace - and may even be nurtured in the nonprofit space first.

There are several nonprofit organizations that specialize in making impact investments. The profits generated from their investments, if any, are then reinvested into new projects.

Invest directly in private companies or funds with an explicit social mission. This may be through venture capital investment or share purchases. For example, you could invest in companies that focus on solar power, carbon sequestration or alternative fuels.

Lend to a nonprofit, whose mission you want to support. One way to accomplish this is through a nonprofit loan fund. Loan funds allow lenders to pool their capital and spread their risk in a diversified portfolio.

Benefits of Impact Investing

Impact investing offers a variety of benefits—some quantifiable and tangible, others less so but still important. Here’s a sample of the benefits of impact investing:

Promote and encourage corporate practices that are important to you, such as fair labour practices or environmental stewardship.

Use more of your resources—beyond what you donate to charity—to support issues that matter to you.

Support approaches to addressing societal issues that are sustainable and not fully reliant on philanthropic funds.

Make your money go further. You can recycle returns on impact investments for further social impact.

It’s also important to note that investing for impact doesn’t necessarily mean you have to compromise financial returns. Numerous studies have looked at the performance of impact investments and found that investing in sustainability has usually met, and sometimes exceeded, the performance of traditional investments.

Sekhar Pariti

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