What is the difference between Impact Investing and Socially Responsible Investing?
by Kim Kastorff
2 May 2013
In some communities like San Francisco, Impact Investing has become a buzzword, creating widespread attention and increasing interest among investors, communities, institutions and government, given the awareness of economic, social and environmental issues. Yet still too often I receive feedback that it is just another 'do-good' or 'go-green' scheme....which is like saying the Golden Gate Bridge is just another bridge.
Impact Investing is quite special and unique. Although, as a young and emerging field it currently suffers from inconsistent definitions and uncertainty, and often gets lumped in with all the other socially responsible and ethical approaches. So, let me attempt to clarify (and to welcome comments)....
From an historical perspective, one key difference is simply the age and the evolution of these terms. Conceptually, the beginning of Socially Responsible Investment (SRI) and Responsible investing (RI) can be traced back to the 18th century, when John Wesley (1703 - 1791) a co-founder of the Methodist Church, preached that you should not exploit others or engage in sinful trade or profit. Specifically, negative screening approaches were followed by the Methodist religion as they believe that investors should not associate with guns, liquor, tobacco or gambling.
Since the 1950s, a series of social campaigns and trade unions have made investors aware of the social and environmental consequences of their investments. During the 1980s, there was significant shareholder activism against South African firms, due to the system of apartheid. This resulted in negative flows of investment to South Africa, forcing the majority of businesses (approx. 75% of South African employers), to call for the end of apartheid (Ethical Partnership Ltd., accessed 2012). Although SRI was not the only contributing factor, this demonstrates the level of importance among global investors.
More recently, impact investing was coined by Anthony Bugg-Levine in 2007 during a meeting at the Rockefeller Foundation. Since then, it has emerged as a a new approach to seeking proactive solutions to our social and environmental problems (e.g. education, poverty, health, energy, etc.), by offering investments that generate both financial returns and social (including environmental) impact. Thus, Impact investing can be considered a derivative of other initiatives, such as responsible investing (RI), socially responsible investing (SRI), and corporate social responsibility (CSR), all of which to various degrees consider values and stakeholder interests within a firm's daily operations.
Ok, so there are similarities and differences. But, here’s where it really diverges. Impact Investing has spun off into its own field or movement, as it more proactively seeks long-term sustainable social impact by applying business acumen and seeking financial returns. Often I hear that 'it is all about the intent', meaning that impact investing must have an initial intent to seek social + financial impact.
Following this trend, Kimpacto, Inc. promotes "Maximizing Financial + Social Impact" with the premise that "Doing good makes good business sense." Overall, Impact Investing has a greater focus on long-term financial sustainability and business fundamentals, as compared to its more religious predecessor- SRI, or other ethics based fields. Still, impact investors care about ethics and responsibility just the same. A key point is that Impact Investing is not a decision of social responsibility OR business fundamentals, it is BOTH.
Today, impact investors are demonstrating that there doesn't have to be a trade-off or bifurcate world which has formerly separated business and social sectors, as suggested by Bugg-Levine. In fact, we are seeing an increasing number of For-profit business sectors and also Non-profit organizations that are blending their financial goals with their social values, and incorporating both in their measurement and reporting.
Unlike other ethical or SRI fields, impact investing utilizes ideas and social practices from a wide variety of both non-profit and for-profit sectors, to include: non-governmental organizations (NGOs), pension funds, private and family foundations, insurance companies, banks, high net worth individuals, grant making, social venture capital funds, private equity, debt providers and social impact bonds (Mulgan et. al, 2011).
Perhaps, one day there will be no difference among the terms- Impact Investing, SRI, RI, CSR or Banking & Investing. If this trend continues all organizations and individuals will bridge their differences and invest for both financial + social impact.
Kim Kastorff has 15+ years of international finance experience and two Masters degrees - MBA and a Masters of Research in Impact Investing. Specific areas of expertise are in banking, financial and investment services, energy and sustainability, consulting, and financial education. Years ago, I told my students the purpose of business is to "Maximize shareholder returns." Today, it seems that stakeholders care about both "Maximizing financial + social impact." So, I am dedicated to helping impact investors and entrepreneurs adjust and remain competitive in this new environment. My goal is to promote impact investing and financial inclusion as we collectively strive for a more educated and financially sustainable global environment.