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Investing for Impact: Strategies Making a Difference for People and the Planet

Strategic investment can be a powerful tool for achieving this goal - however, investors have specific criteria they need to consider in order to ensure that investments are both profitable and beneficial to people and the planet.
investing with impact

Imagine a world where you could make a positive difference while generating a solid financial ROI for your efforts. Impact investing allows you to do just that by offering an approach that acknowledges the interconnectedness of social, environmental, and economic systems while aligning investment decisions with your personal values and impact goals.

Impact Investing vs Traditional Investments

Although there is some overlap between traditional and impact investing, the key difference is in intent. For example, both investment strategies involve various instruments and risk evaluation scenarios, and both work best when the portfolios are diversified.

However, impact investing considers the social and environmental implications alongside potential financial gains. Traditional investors mainly evaluate risk in relation to expected financial performance, regardless of the effect such an investment might have on social or environmental factors.

Increasingly, leaders in traditional investment sectors are looking to get involved with impact investing for a variety of reasons.

For example, Bill Gates is deeply involved in funding projects that seek to address pressing issues like education, health, and the impact of climate change on societies around the world. His Breakthrough Energy Ventures fund invests heavily in early-stage companies that are working on developing clean, affordable energy technologies. This initiative aims to accelerate the transition to a low-carbon economy and combat climate change through impact investing.

Patagonia is an outdoor apparel company that’s known for its commitment to environmental and social responsibility. Their founder, Yvon Chouinard, has incorporated sustainability and social/environmental impact into Patagonia’s business model from the very beginning, and its core audience of outdoors enthusiasts are happy to support the company for this very reason.

Their varied approaches to impact investing go further than the standard ESG model by actively supporting initiatives that address the challenges we face. As such, Patagonia has created the $20 Million & Change fund to invest in startups and organizations that align with their values and mission through direct financial assistance and mentorship programs.

Other backers of impact-directed companies and organizations include Acumen, Blue Haven Initiative, and Transformation Holdings.

Benefits of Impact Investing

Impact investing benefits its financial supporters and companies committed to enacting change in a variety of ways. They meet their goals through their effect on sustainability, social justice, and environmental conservation.

Before putting your money into impact investments, it’s essential to evaluate your options in terms of the beneficial social and economic impact in addition to the possible financial gains of such investments. However, you should also consider any negative aspects of your investment.

Both can be difficult to gauge.

Impact investing provides positive returns by:

1. Driving social and environmental change. Impact investing contributes to positive social change by addressing issues such as poverty alleviation, education, healthcare, and gender equality. It can also promote environmental sustainability by investing in renewable energy, clean technology, and conservation efforts. These investments will transform communities and ecosystems throughout the world.

2. Aligning values with financial goals. Impact investing allows individuals and organizations to align their investments with their personal or organizational goals and values. It allows you to invest in projects and businesses that are making a positive difference in the world while still gaining financial returns on your investment

3. Supporting innovation and entrepreneurship. Impact investing supports innovative and entrepreneurial solutions for growing societal challenges that have historically been shut out of all but grassroots support. This helps support the development of new technologies, business models, and approaches that benefit society and the environment.

Despite the growing popularity of impact investing, its current scale is relatively small compared with the range of options in traditional investment markets. The total amount of capital dedicated to impact investments is still a fraction of the overall financial markets, limiting the potential impact and financial returns.

However, the problems it seeks to address will only worsen over time, making this type of investment a potential area of explosive growth. Even as these industries see success in the impact of their various ventures, new technologies, and innovations in these sectors are ripe for investment and will continue to evolve.

Positive vs Negative Impact

Although the benefits of impact investing are many, it’s important to remember that this is still a dynamic and evolving field. Therefore, it requires due diligence and careful evaluation of potential risks.

For example, there could be measurement and reporting challenges in terms of evaluating the actual impact of the investment relative to its social and environmental advantages, which can be subjective. Reporting standards and methodologies also vary, complicating the ability to compare the impact across your portfolio as a whole.

Impact Investing Has Its Risks

As with many types of investing, impact investments are not immune to financial risks. There’s a potential for loss of capital or lower-than-expected financial returns that should be evaluated against the potential advantages of each investment in terms of their impact in the real world. Factors like market volatility, economic downturns, regulatory changes, and business performance can all influence the financial viability of impact investments.

Many impact investments lack liquidity because they’re not easily converted into cash. There’s sometimes also a longer investment horizon and limited exit options, which further impact liquidity and may make it difficult to access funds when you need them. This could, in turn, affect the ability to exit an investment before maturity or if the investment fails to perform as expected.

Then, there are specific market and sector risks. Untested or emerging markets are subject to a higher degree of doubt and scrutiny. When the discourse surrounding anything related to social or environmental progress is involved, higher political, economic, and regulatory risks come with the territory.

Investors should also be on guard for the problem of mission drift. Occasionally, companies that begin with an alignment of moral and financial imperatives veer away from their intended social or environmental goals over time and begin to prioritize financial returns at the expense of their initial impact objectives.

As with any investment strategy, it’s essential for impact investors to conduct thorough due diligence, assess risks, and diversify their portfolios to manage these risks effectively.

Working with experienced professionals who have deep knowledge and experience with impact investment strategies can help mitigate potential risks and enhance the likelihood of achieving both financial and impact goals.

Impact Investment Strategies

Our goal is to educate potential investors on the available options that lie at the intersection between innovation and change. Impact investment strategies encompass various approaches that align with specific social or environmental goals.

Some of the most common impact investment strategies include:

Thematic investing, which focuses on specific social or environmental issues like renewable energy, clean technology, affordable housing, healthcare access, education, gender equality, or sustainable agriculture. These investments aim to generate a positive impact in targeted areas.

Environmental, Social, and Governance (ESG) integration that evaluates a company’s ESG factors alongside financial analysis when making investment decisions. These strategies assess company performance in environmental sustainability, labor practices, community engagement, board diversity, and ethical governance.

Community development finance that injects funds into under-served communities or regions with the goal of promoting economic development, job creation, and poverty alleviation. The range of possible investment opportunities includes affordable housing projects, microfinance institutions, community development banks, and initiatives that support SMEs in disadvantaged areas.

Impact bond purchases, which bring together investors, service providers, and outcome financers to address social or environmental challenges. Investors are repaid based on the achievement of predefined outcomes, such as reducing recidivism rates, improving educational outcomes, or increasing access to healthcare services.

Sustainable infrastructure investment strategies that focus on projects that contribute to the development of sustainable infrastructure. These include investments in renewable energy projects, energy-efficient buildings, clean transportation, waste management systems, and water and sanitation infrastructure.

Impact venture capital funding that injects capital into early-stage or growth-stage companies with innovative solutions to social or environmental challenges.

Gender lens investing in businesses with diverse leadership as well as products and services that address gender-related issues or projects that promote women’s economic participation, access to finance, and health and education.

Final Thoughts

Investing for impact is about doing well by doing good. By aligning investment decisions with personal values and impact goals, investors can generate positive social and environmental returns while also earning a financial return.

However, impact investing requires careful consideration of the risks and opportunities, as well as a commitment to accurately measuring and reporting impact.

Ultimately, the goal of these investments is to make the world a better place, one investor at a time. If you want to learn more about impacting investing, get in touch with Dr. Walter Schindler to schedule a consultation today.

Our strategies could make a difference for more than your bottom line.

June 5, 2023

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