Why impact investing is not charity — and five other myths

01/04/2020

Investing for impact is not only truly exciting, it also has terrific potential to address some of the world’s greatest challenges. It would therefore be a terrific shame if its growth was held back by common misconceptions.

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Their genesis is arguably the notion that impact investment is about putting money to work to do good, rather than to turn a profit – a form of charity, in other words.

This is not so, of course. The aim of impact investments is to achieve a social or environmental purpose alongside financial gains – not instead of them. Here are five of the most common myths about impact investing that need to be dispelled.

Myth 1 – Investing for impact means compromising returns

Of course, there can be no guarantees when it comes to returns from investing, but there is no evidence that impact investing necessarily leads to lower financial returns over the long run.

When the pursuit of financial returns is given the same priority, this should be little surprise. After all, why shouldn’t a company and its shareholders enjoy financial success if it delivers positive societal benefits through its business?

The two goals can – and should – go hand in hand. There are clearly multi-billion-dollar opportunities for innovative companies that can successfully deliver solutions to the challenges facing society and the planet. Moreover, good corporate citizens should be on the right side of stricter regulations and the trend towards more conscious consumerism.

Myth 2 – It involves more investment risk

All investments carry the chance of losses, of course, but the risks always relate to what it is you’re investing in. There’s no obvious reason why investing for impact would necessarily mean your money is at greater risk than investment approaches unconcerned with impact.

A misconception might be that all impactful companies are start-ups with big dreams and no profits – the archetypal high risk investment. To the contrary, we believe large industry-leading companies – often more stable, lower risk investments – can have a terrific positive impact on society or the environment, by virtue of their size.

Incremental steps like more efficient processes can have a transformational effect when taken at scale. Incumbents which spearhead and normalise impact in their industries can play a leadership role that galvanises wider long-term impact initiatives among their peers. Companies can also play an enabling role by providing the tools, like software or technology, that makes it possible for others to deliver positive change.

Myth 3 – It’s wishy-washy

An accusation sometimes levied at impact investing is that it might lack the analytical discipline of traditional approaches. Admittedly, being a relatively young discipline there can be a lack of common standards, but this does not mean there is lack of rigour.

Applying an effective framework provides more than a clear conscience. If successful, it can offer a repeatable process to manage risks and identify impact investment opportunities. As well as assessing the impact that a company has through its activities, we can attempt to gauge the extent to which companies explicitly and genuinely intend to address a problem facing society or the environment.

Critically, this analysis of impact and intentionality should be alongside – not instead of – analysis of the investment case.

Myth 4 – You can’t measure impact

Admittedly, measuring impact is not as black-and-white as measuring financial returns. But that does not mean it isn’t possible to do in a meaningful way.

The UN Sustainable Development Goals (SDGs), which articulate the world’s most pressing environmental and societal challenges, are a useful – and universal – reference point for impact investors. Since these are, arguably, the issues that matter most for people and the planet, companies that contribute towards achieving them can be judged to have a positive impact.

To gauge the extent of this impact, we can determine key indicators of performance that align to a specific SDG. These will be relevant to the activities of a business. So, for instance, we might measure the impact of a renewable energy company in terms of carbon emissions saved. By measuring performance over time, we can gauge a company’s progress towards realising the SDGs.

Myth 5 – You can’t make a difference

When it comes to investing in listed company shares, the difference we make through our investment – known as the “additionality” – can be understood by considering the impact made by the company we invest in.

To evidence additionality, we might ask how the world would be different if that particular company did not exist and consider if it has some technological know-how or impact footprint that would be hard for a new company to replicate. As shareholders owning a percentage of the company, you can play a role in delivering that positive impact.

The views expressed here should not be taken as a recommendation, advice or forecast.

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