By: Kim Kastorff
So you have heard all the "Impact Investing" buzz around proactively seeking and measuring both financial return + social impact. But, perhaps you are a bit skeptical or question all the hype? Already we have ESG, RI, SRI, CSR, so does Impact Investing add anything new? Is this just another marketing scheme, or is it really something different? I wondered the same thing, so I took an historical look and here's what I found…
The 18th century marked the beginning for environmental, social and governance (ESG), and responsible investing (RI) which includes a broad range of activities and firms from which Socially Responsible Investing (SRI) has formed. ESG showed increasing popularity during the 1970´s when environmental pressure groups such as Greenpeace and Friends of the Earth began the fight against pollution and waste, and today many firms consider "ESG" factors in their daily operations and goals.
Eurosif offers a general definition of SRI to include “any type of investment process that combines investors´ financial objectives with their concerns about ESG” (UN PRI, RI Digest, 2011). The SRI field has evolved more significantly by offering modern and innovative investment strategies, such as positive screening, best in class, shareholder activism, and more recently impact investing. These SRI strategies are considered more proactive, as compared to the negative screening and religious foundation of the RI field.
Impact investing is also closely related to its antecedent Blended Value (BV) coined by Jed Emerson in 2000. BV applies to both for-profit or non-profit firms, who create economic, social, and environmental value components, and whose investors (market-rate or charitable) together generate value by providing capital to organizations (Jed Emerson, www.blended- value.org). While impact investing builds on former BV approaches, it differs in its more proactive investment strategy, quantitative measurement of social return, and a goal of long-term sustainability. According to Bugg-Levine and Emerson (2011), “Impact investing is what we do, and blended value is what we produce.”
You could say that Impact Investing is a proactive strategy under the SRI umbrella, with a goal of generating value. Impact investing was coined in 2007 with the purpose of offering a unique and innovative investment approach, which expands upon the broader antecedents of the SRI and CSR movements of the past two decades (Bugg-Levine & Goldstein, 2009).
Ethical Investing also differs to Impact Investing as these former approaches seek to merely avoid investment in harmful activities (e.g. guns, smoking) through negative screening, while the latter applies positive screening or proactive approaches to seeking positive social impact. Impact investing utilizes various socially constructed and accepted viewpoints (e.g. smoking is harmful to one´s health), but additionally seeks socially positive impact areas (e.g. reducing poverty), therefore considering both negative and positive SRI screening strategies.
The religious foundation of socially acceptable practices has formed the basis for the SRI field, and subsequently impact investing which offers a more proactive strategy, as compared to other CSR or ESG practices (Fulton & Freirech, 2009). Impact investment involves proactively utilizing capital (e.g. debt, equity) in order to achieve social or environmental benefits as well as financial returns, which differs to other SRI strategies which may apply positive or negative screening to publicly listed companies but are less proactive in targeting social objectives (Ruttmann, 2012).
So, is Impact Investing different? Impact investing is a more proactive strategy towards achieving social impact. Although, impact investing has stemmed from other SRI investment strategies, such as negative/positive screening, best in class and shareholder activism, it can be distinguished through its innovative investment products, and proactive social impact approach.
Collectively, areas such as CSR, SRI and Impact Investing have triggered greater awareness due to the global credit crisis, which demonstrated that “helping the financial sector become more sustainable is an imperative for our societies” (Imbert & Knoepfel, 2011). What is meant by more is to be able to serve social needs. Impact investing serves social needs by generating funding flows from a more leveraged pool of private sector investors, thereby increasing the long-term sustainability of social projects (Bridges Venture et. al, 2010).
By combining business acumen and products with the motivation for social change, we see that Impact Investors are demonstrating their unique (although not silver bullet) solutions to delivering financial returns + social impact. Without a doubt, impact investing is a growing field offering unique strategies and solutions for long-term sustainable social change...so join the buzz and let's try something new.
Doing good makes good business sense - Kimpacto (kimpacto.com).
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.