Global عربي
KSA عربي
Global عربي
Impact investing is a strategy where the ultimate objective is to both make returns and have a positive social and environmental impact.
As a form of thematic investing (which we’ve discussed in a previous entry), impact investing adopts a long-term approach that seeks to capitalize on a wider socio-economic trend. The difference being, that the driver for impact investing is to create positive change.
Read more about: What is Thematic Investing?
Unlike a traditional business and conventional investing, where the objective is to make a profit, and philanthropy, whose sole purpose is to enact positive social and environment change, impact investing bridges the gap between both. Impact investing is characterized by:
- Intentionality: Investments are made deliberately to maximize positive outcomes for the intended stakeholders.
- Measurable impact: Investors must establish a set of targets, metrics and KPIs to make sure that the investment is achieving the desired impact.
- Diverse investments: As a form of thematic investing, impact investing cuts across a variety of asset classes and investments – as long they do not cause harm or any negative impact and comply with the investment thesis.
- Financial return: As the other half of impact investing, securing financial returns is crucial for the strategy to work. However, unlike with conventional investing, where maximizing returns is the goal, profits may need to be tempered with the possible wider social impact.
In global business, impact investing has been centered on three core areas: Environmental, social, and governance (ESG):
- Environmental: This area will see investors fund projects, companies, organizations that help mitigate, adapt and – in the case of technologies such as carbon capture – reverse the impact of climate change,
while fostering sustainability and conservation. Examples include investments in renewable and clean energy and in technologies that reduce the carbon footprint such as electric vehicles.
- Social: This area sees investments in tackling social and socio-economic issues with the aim of fostering development, equity, poverty alleviation and financial inclusion.
Examples, include funding education, infrastructure, healthcare, social entrepreneurship, and businesses that target traditionally marginalized communities and segments.
- Governance: This area sees investors influencing management, behaviors, structures and processes in companies, organizations, and governments with the aim of making them more equitable, making them more environmentally conscious and fostering ethical business practices. Examples of this include board committees that tackle ESG.
Read more about: Investment Expressions You Must Understand Before Entering the Market
As noted as above, impact investing relies on diverse assets and investing strategies in order to achieve the dual goal of public welfare and financial profit. Impact investing can take a variety of different forms:
- Public equity markets: Supporting publicly-listed companies that are ESG-focused by buying their shares can be an easy method for impact investors to achieve their goals.
Example of this include buying stock in a publicly-listed renewable energy companies.
- Private equity and venture capital: investing in early, mid, or high growth startups and companies that have not yet listed or do not plan to list on public markets is also another common way impact investor can support the overarching goal of meeting ESG standards. I
t can be very lucrative should the company eventually list. However, it can also be very risky financially, as without public markets, investors have very few avenues for an exit.
Read more about: Private Equity & Venture Capital as Asset Class
- Active shareholder participation: Sometimes it is simply not enough to invest in a company that has declared its adherence to ESG principles. I
t is crucial for shareholders to actively monitor the companies they invest in. By monitoring their portfolio companies’ activities, participating in general assembly meetings,
and voting for board members impact investors can influence management and ensure they comply with standards.
- Bonds: As the ESG wave began to feature prominently in the investment thesis of many large investors, companies, governments (both local and private), and other organizations have begun to issue bonds whose proceeds will be used to fund environmental and social projects.
These include infrastructure bonds, which will be used to advance infrastructure projects, green bonds, which are used to fund environmental projects, and blue bonds, which will fund water management projects. By buying into these bonds, impact investors can help fund ESG projects.
Read more about: Bonds vs. Sukuk, Key Differences & Investment Benefits
- Microfinance: One of the stated objectives of many microfinance companies, fintech firms and non-banking financial institutions is to provide funding for those that have been traditionally shut out of the banking system (or the “unbanked”).
By launching, funding, and investing in these firms, impact investors can help drive capital and investment in traditionally marginalized communities.
Read more about: All you Need to Know about Microfinance in the UAE
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
