As a relatively new concept, it’s possible you haven’t heard the term ‘impact investing’ before. However, the Global Impact Investing Network (GIIN) sizes the existing market at $715 billion – and this is expected to scale up in the future.
Impact investing contains many of the features associated with traditional investment. It sees people provide funding to businesses in exchange for equity and a hopeful return on profit. However, alongside the financial objectives, investors choosing to support an ‘impact’ enterprise will be seeking to make the world a better place. By its definition, this type of investment focuses on addressing social and environmental issues by financing the development of appropriate solutions.
Although it is easy to see the philanthropic worth of impact investment, many may question its viability. Historically, investment has been associated with generating profit, and it may be assumed that profit and charitable causes do not go together. As such, it can be questioned whether impact investing is simply the latest trend or if it can provide long-term benefits for business.
In this blog, we explore the implications of impact investing and how it might shape the future of lending and business.
- What are the benefits to businesses?
- Does it offer ROI?
- What is the impact on investors?
- What is the wider impact?
What are the benefits to businesses?
Businesses who have a social or environmental cause at the heart of their value proposition may struggle to get funding, particularly if their offering is not deemed commercially viable or capable of generating profit. However, value can often still lay in these businesses, especially those affected by the issue they seek to address.
Impact investing can offer an alternative route to finance such enterprises. By shifting the focus solely from profit towards social impact, their worth may become more apparent for investors and help them secure the capital they need to launch their products or services. By doing so, they can fill notable gaps in the market and serve more vast audiences.
If impact investment were to grow, it might lead to more enterprises incorporating important causes into their plan, with the comfort of knowing there are funding opportunities. This might force more businesses to push corporate social responsibility in their offerings and encourage entrepreneurs with valuable ideas to take the leap and pursue it. These lead to an increased number of start-ups, a more diverse business population and a stronger connection between industry and social-environmental issues. Over time, this could create a happier, more equal society where businesses have a responsibility to act conscientiously.
Does it offer ROI?
The return on investment offered through impact investing is the subject of some debate. The average reported return rate is around 5.8%, which may be considered low compared to traditional investing. However, this is not taking into account the broader value offered to the world.
The GIIN reports that the main challenges include obtaining appropriate returns for risk, identifying exit options, government support, and understanding the market. However, there has been some level of progress in each of these areas, suggesting we could see a shift.
It is worth noting that, as per traditional investment, success will depend on the business being backed and its ability to create a strong value proposition and competitive model, generate demand and sales and operate efficiently. Though the LSE reports success stories as being limited to date, it also suggests that they are possible with the right foundations.
The market is predicted to double, which could bring more opportunities for victory stories. It’s also significant that, as a society, we are increasingly aware and concerned with social-economic issues, particularly following the coronavirus pandemic and its ramifications. It’s reported that a rising number of investors are seeking to place their money in ‘green’ ventures in response to climate change, hinting that we could see a seismic shift in the number of impact investments being made. This might bring an increased return on investment and tie together the ability to profit while helping the planet.
What is the impact on investors?
Alongside the advantages to businesses, investors can benefit from impact investing.
As we’ve already touched upon, impact investing brings together the profit emphasis associated with investment and charitable objectives. While these previously have been separated, if impact investment continues to grow, it could become more commonplace in the market. This could also change public sentiment towards investment for the better.
For investors who want to achieve more with their money, such as pursuing philanthropic ambitions and making a difference, it’s an ideal solution to do so while still getting a return on investment. It can also progress them and their firms towards CSR goals they may have, which can have favourable impacts on their reputation and targets.
Impact investing can also diversify the types of businesses available to investors. If they seek new challenges or look to vary their portfolio, this can unlock a whole host of opportunities to explore.
What is the wider impact?
Beyond the potential implications for businesses and investors as a whole, impact investing is unique in its ability to affect the rest of the world. If the right ventures are given funding to develop and provide their products and services, it could reduce inequality, ease environmental threats and adjust the world for the better.
With this, more comprehensive groups of people will benefit, having their needs served. It could even bring long-lasting socioeconomic impacts. While these are factors that won’t be included in typical ‘return on investment’ assessments, they should not be ignored as we strive to address our society’s problems.
Although impact investing is still in relatively early stages – some people have already been doing it for years – there is much to be discussed. The dominant advantage currently is that it enables more businesses to secure the finance they need to establish themselves and begin working on social and environmental issues.
However, looking ahead, it’s harder to tell what the lasting consequences could be. While there is room for improvement in return on investment, there are significant advantages to be unleashed when it comes to making the world a better place. If impact investing scales as predicted, more entrepreneurs may seek to bring causes into their value proposition. Similarly, more investors may see philanthropy as a motivator.
The combined effect will be a growing population of socially responsible businesses which promote equality and sustainability. As a result, we all benefit.
If you are seeking investment for your business – impact or otherwise – we are here to help. We have a broad range of contacts in the market and take your requirements into consideration to put you in touch with the right people.
We can also help you shape your investment pitch and business plan to boost your chances of success.
Get in touch today to find out more.