Impact Investing

IMPACT INVESTING: Investments to create a better future

Impact investing is quickly catching on among funds worldwide. It is a fairly new practice that is built around a commitment to measure social and environmental performance, with the same rigour as that applied to financial performance.

This industry is still quite young. Just how young? Well, the term ‘impact investing’ emerged around 2007 and the funds that took on this challenge defined it as “investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.”

Some funds occasionally dip a toe in the shallow end impact investing for good publicity, but a few have decided to focus a majority of their resources, if not all, on impact investing. A good example of a fully committed fund is Generation Investment Management, which is run by former Vice President of the United States and avid environmentalist Al Gore. One of his favourite slogans is “sustainability is history’s biggest investment opportunity”.

As time goes on the industry is attempting to create a standard that will be used to define what a ‘socially responsible’ company is. Currently,

companies that pass for socially responsible have a measure/rating called the Environmental, Social and Governance rating (ESG). An ESG rating is only awarded after looking at the policies and practices of the businesses and concluding that the business is making an effort to go green in one way or the other. A good example of how some companies achieve an ESG rating is when they use solar or wind energy to power their business. There are many ways a company could achieve this rating depending on how creative they are willing to get with their policies and practices. Many companies are figuring out how to bend the rules in order to get more ‘impact investing’ capital.

If you happen to look through some of these ESG portfolios with a fine tooth comb you would find a few oil and gas companies or even a random tech company. For example, Facebook has recently made it onto ESG portfolios because their data centres are powered by renewable energy. This is a tremendous effort on Facebook's side, but in a way, it defeats the purpose behind impact investing. The meaning of the term ‘socially responsible’ is difficult to pin down so a lot of companies can get away with calling themselves that. However, the tide is slowly changing.

To define what socially responsible means, the industry is beginning to look at companies through the lens of Sustainable Development Goals (SDGs).

The Sustainable Development Goals are 17 goals established and agreed on by 193 world leaders to be the most important challenges that we’re facing as a planet.

Having the SDGs are a stable reference point, we can begin to ask the difficult questions like: Is a company that has 98% of its total revenue generated from advertising, really socially responsible?

I mean renewable energy is always a plus but how does the core business of the company impact the sustainable development goals?

There are a few legitimate ESG businesses out there that can hold their own weight when it comes to the Sustainable development goals. A good example of one of these companies is Mohawk Industries, a company that takes plastic waste and turns it into carpets or E-lab, a company that turns waste from electric gadgets into works of art.

Billionaire Chamath Palihapitiya

Using the SDGs as a reference point you can begin to anticipate certain trends in policy that favour different kinds of businesses. For example, in response to SDG 3 (good health and well-being) and 7 (affordable and clean energy), some countries are banning Internal Combustion Engines(ICE) that most cars use. This might put electric vehicle manufacturers at an advantage in the long term.

Does impact investing have the same results at traditional investing?

This is the question that makes the biggest difference because despite supporting a good cause most investors seem to be keener on ROI (Return on Investment). There have been a number of studies around this question and to properly answer it we need to first look at how performance is measured in traditional investing.

A stock index or stock market index is a measurement of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average of the stocks grouped together for a given reason). It is a tool used by

investors and financial managers to describe the market, and is used as a benchmark for the performance of the specific stock.

You might have heard of a few of these indices which are used to describe stock, for example the Dow Jones Industrial Average (or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States), the S&P 500 (500 large companies with common stock listed on national stock exchanges) and the Russell 3000 (a capitalization-weighted stock market index, maintained by FTSE Russell, that seeks to be a benchmark of the entire U.S stock market). The mentioned indices act as a general measure of how well stocks are performing. Socially responsible businesses have also been grouped together as well and one of their indices is called the MSCI KLD 400 and for the past 25 years this index has met and outperformed various indices like the S&P 500 and Russell 3000. It’s a good sign if you can meet and exceed industry standards, all the while doing a whole lot of good.

When addressing the Stanford School of Business, billionaire and founder at Social Capital, Chamath Palihapitiya said “There is this whole debate about climate change, on whether it exists or not. But what we know for sure is that we are ripping apart the biodiversity of our planet… what’s undeniable is that the human population will be forced to concentrate because certain parts of the world will be subsumed by water. Also, keep in mind that we don’t have any sustainable food supply. You guys, the students in this room, may not be able to hand off a planet to your children that they can predictably live in. And no one is doing anything to fix it!

But if someone fixed it, don’t you think that that’s where all the money would be?!

That person would be a multi-trillionaire!” ◊ ◊ ◊ ◊ ◊ ◊ ◊