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).
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.