Impact investing is not just a feel-good story. It is hard capitalism at its best.
Impact investing has become a hot topic in the private equity industry. In essence, impact investing is powered by investors wanting to effect positive and sustainable change in society.
Globally we face urgent challenges of poverty, inequality and climate change. With an expanding population globally and the growing need for infrastructure, housing, healthcare, sanitation, food security and education, the demand for capital to fund development in these areas is ever-increasing. Neither government, nor philanthropy, even combined, are equipped to solve these problems alone. Investment funds with an impact investment strategy could help to satisfy the need for capital in these sectors.
At the most basic level, impact investments are those that aim to generate a financial return as well as a social benefit. Because of the dual benefit, many refer to them as double bottom line investments. The promise of a financial return helps to leverage capital in ways that are beyond the scope of traditional grants.
The definition developed by the Global Impact Investing Network (GIIN), the closest thing the field has to a trade association, provides a good starting point. GIIN defines impact investments as: “investments made into companies, organizations, and funds with the intention to generate measureable, beneficial social or environmental impact alongside a financial return”.
The strategy of an impact investment fund is to invest in projects and companies typically in developing countries that will have a positive impact on the environment or the local communities while also promising a reasonable return to its investors.
More and more investors are factoring in the social impact that the investment decisions their fund managers make may have on society.
A socially responsible investor is looking for a manager or investment opportunity that can not only unlock value in the form of financial return through the investment but can also identify projects that will have a significant impact on the community.
Traditionally social impact investment aspects were considered as part of a fund manager’s ESG policy, scoring potential investments on the following criteria:
• Environmental impact: energy use, waste, pollution, conservation of natural resources, animal treatment;
• Social criteria: looking at a company’s business relationships – does it perform volunteer work, or work with suppliers that have the same values?
• Governance criteria: investors want to invest in companies that avoid conflict of interest; do not engage in illegal behaviour; are not politically exposed; that make use of transparent and accurate accounting methods.
Guided by standards such as the United Nations Principles for Responsible Investing, a fund manager embracing these standards would penalise target investments which have a negative ESG status by adding an additional premium to the required rate of return (RRR). Conversely, a fund manager would discount the RRR if a target investment had added positive ESG benefits.
Impact investors go a step further. Impact investors sit on the threshold where philanthropy meets traditional investors. Impact investors prefer to operate in the unlisted or private equity arena where they can have more control over how their investment capital is deployed.
Importantly though this is not just a feel-good story. This is hard capitalism at its best. Capitalist investors have realised that in order to secure their own survival they must ensure that their investments are sustainable - sustainable for the planet and the people who live on it.
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Jacolene Otto, Senior Manager – Private Equity & Real Estate, Maitland
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