Impact Investments : Investing for a change
Mark Twain once said ‘the two most important days in your life are the day you are born and the day you find out why’. For years, this quote of Twain has kept us motivated in searching raison d’etre in our personal as well as professional life. ‘Purpose driven businesses’ has become a keyword in corporate and financial world in the recent past. If you are an airline company, taking passengers from one to other destination or if you are a newspaper company, collecting and publishing news material are the prime objectives behind your Businesses. However, in these challenging times ‘how you do’ has gained more importance than ‘what you do’? Meaning, even though by transporting passengers or publishing newspapers you are serving the community, if your airplanes cause more air pollution than your peers or the paper you use for printing newspapers has been produced on the cost of deforestation in your region, at the end of the day probably your business activity is negatively impacting on people and planet rather than your intention of serving the community. Therefore, no matter what sector or activity you are involved in, inclusion of social and environmental concerns in your organisational strategy has become not only a matter of choice but an immediate necessity. Shall social and environmental outcomes should be treated as a priority above making financial returns in a commercial company? Probably not. However, studies have repeatedly confirmed that businesses which take into account the extra financial performance (social and environmental) from their business activities have maintained a sound financial performance over mid and long terms. These findings have led to attract attention of big corporates and investor community to businesses with social and environmental impact. Investing in such projects or companies is commonly known as impact investing. Impact investing is an Investment which has a primary objective of achieving measurable social / environmental impact alongside of financial returns. It is fundamental that the social or environmental outcome is not just a by-product or addon of the business activity you do but the very purpose behind the business. The ‘impact first’ rather than ‘returns first’ approach is the major distinguishing factor between impact investing and other forms of Investment activities. Philanthropy or donations themselves could not be considered as impact investing. However, they can become a catalyst in promoting impact investments by providing financial means to projects with measurable impact. In 2010, a report published by JP Morgan predicted that over the following 10 years, the impact investing market had the potential to reach up to $1 trillion in invested capital and up to $667 billion in profit. The recent trends from 2012-13 are in favour of these predictions of JP Morgan. For instance, across the world, crowd funding platforms which promise positive social impact from investment projects raise $2 million per day. That’s the equivalent of $87’000 per hour or $1’400 every minute. And after all why not? The investors want more than just financial returns. They want to be part of the process to change the world in a better place for future generations.
Luxembourg – being a leading investment fund and private banking centre with a long time engagement in development aid, is well positioned to play a catalytic role for impact investing on its pathway towards becoming a mainstream asset class. European Impact Investing Luxembourg (EIIL) is a group of Luxembourg-based firms in the financial services sector that seek to promote Luxembourg as a hub financial centre for impact investing. LuxFLAG- the Luxembourg Fund Labelling Agency which promotes the raising of capital for Responsible Investment sectors by awarding a recognisable label to investment funds is in process of developing a specific label for funds active in Impact Investing. Since Impact investing is the new buzz in the market, the question which comes in to mind of people engaged in alternative financial themes for years is aren’t we engaged in the same business of impact investing through so called Socially Responsible Investments or sustainable investments of which one of the most known example is microfinance? After all isn’t it all the same? The answer will be debated over the years and only time will tell if the new buzz of impact investing in the corporate and financial sector is just a hype or an exciting investment opportunity which provides sound financial returns with a positive social and environmental impact? Personally I feel quite convinced about this new trend and the potential for impact investing industry in the future.
Sachin S VANKALAS Head of Operations and Sustainability, LuxFLAG, Luxembourg