The term ‘investment’ is generally associated with individuals possessing a high net worth who want to obtain a higher return from their money by placing it into promising enterprises. While the focus is on investment return for many investors, there are other motivations, such as those found in impact investing.
Impact investing is associated with investors who want to pursue altruistic goals as well as financial ones, addressing social and environmental issues through their funding choices. As such, it can benefit businesses that have philanthropic objectives in their value proposition but who may struggle to secure backing through traditional funding routes.
Impact investment is growing in size, so now is an excellent time to learn about how it works and what it could mean for businesses and the lending market as a whole. Below, we delve into more detail about how it works and its advantages to entrepreneurs and the wider world.
How does impact investing work?
Impact investing refers to financial backing from any individual, company or organisation that intends to create a social or environmental impact, alongside the traditional profit generation. The issues it can seek to address vary, but include the likes of inequality, sustainability, conservation, renewable energy, access to healthcare/education and so on.
This type of investment can be done by many entities, including private investors, angels, institutions, family offices, private foundations, insurers or pension funds. There are also specific networks for it, such as the Global Impact Investment Network (GIIN), which aims to increase the scale of investment and encourage more people to get involved.
Historically, investment has been seen as purely financially orientated, whereas funding that targets social or environmental issues was left to charities, grants and specific schemes. Impact investing brings the two together, allowing investors to secure return on investment while helping ‘the greater good’.
It is worth noting that, as with any investment, businesses must still prove their ability to generate sales and profit. This means having a solid business plan and proposal that demonstrates a strong understanding of their market and strategies that will lead to success.
What are the benefits of impact investment?
There are many advantages associated with impact investing.
It offers a route to funding for businesses who have social or environmental causes at the heart of their value proposition. This is particularly powerful in instances where these businesses may not typically be seen as commercially viable by shifting some of the focus away from generating sizeable levels of profit and towards serving other needs. As such, more ventures may be able to secure finances to establish themselves and impact the world.
By allowing these businesses to launch, there is the opportunity for a broader audience to be addressed. Social and environmental enterprises can identify niches in the market and address the public’s pain points, outside of those that may be associated with the stereotypical consumer. In this sense, impact investing has the power to help vast groups of people rather than just financiers and businesses.
For investors, there are also plenty of favourable outcomes. Depending on their motivators, impact investing can serve their objectives to generate profit and help the world simultaneously. It is also a way of identifying new opportunities, which could help investors diversify their portfolios and engage with entrepreneurs they may not encounter in traditional circles.
In the case of foundations and organisations, having impact investments on their roster can help move them toward corporate-social responsibility aims. This, in turn, can lead to positive publicity and build reputation. It also can alter the way people feel about investment in general by showing a more ethical side to it.
Finally, impact investment is an expanding market. The GIIN’s 2020 Annual Impact Investor Survey found that the current market size is at $715 billion, and this number is set to increase. If investors seize the opportunity now, it could help them become part of the flourishing movement and reap the benefits as it grows.
Impact investing is just one of many types of investment. However, it differentiates from the rest by tying financial gains to making the world a better place. For investors wishing to introduce increased altruism into their investing and businesses trying to obtain capital to make their socially-minded vision a reality, it can prove a helpful solution away from traditional investment routes.
As we become more conscientious as a society, particularly following the ramifications of the coronavirus pandemic and increasing attention on topics such as social inequality and climate changes, impact investing is sorely needed. Though it is still a relatively new concept, the market does look set to increase – and we may see social and environmental responsibility become a valuable part of all investment.
If you are seeking investment or other forms of funding for your business, we can assist you. We have a broad contact base within the business finance sector, allowing us to put you in touch with relevant connections to raise the capital you need. We can also take you through the options available to find the perfect choice for you dependent on your unique requirements.
Get in touch today to find out more.