What is Impact Investment and is it right for you?
There are a lot of buzzwords in the investment industry and they can become confusing. One of the most popular at the moment is impact investment.
Impact investments are a form of ethical investment. It is a way of using capital and investment to meet the social or environmental challenges. It is not a form of charity the brilliance of impact investment is that it argues that doing good as possible while also making a profit. Impact investment is about making money and helping society. This form of capital allocation has proven to be very successful. There is a wide range of companies and platforms that now offer impact investment. It is not just another form of socially responsible investing. While socially responsible investing is about avoiding harm, such as perpetuating inequality and activities that damage the environment.
Impact investment goes beyond this and seeks to not only avoid harmful behaviours but seeks to have a positive impact on society and the environment. Those who are involved in impact investing seek to make their capital work both for them and for society. Impact investors want to make money and to make a positive contribution to society. They see themselves as stakeholders in a company and in society.
Impact investment seeks to put capital to work in areas such as sustainable agriculture, clean technology, and green energy.
This form of investment is very popular with millennials. Indeed, many brokers and platforms are now offering investors the option to make impact investments, because of the demand for this form of capital allocation. However, many financial institutions are now also actively engaged in impact investing.
Advantages of Impact Investment
This form of capital allocation is great if you want to practice what you preach. If you want to make the world more equal and more sustainable then impact investment is right for you. This form of investment is also great for those who want to change businesses and their organisational culture. Those who allocate capital based on the ethical and social, responsible policies of companies are encouraging change. This can persuade many more companies to become greener and more socially sustainable. On a personal level impact investment is great. It can give the investor a great sense of wellbeing and even fulfillment.
Impact investment sends a message. It informs business leaders that they need to be more ethical. This can lead to more long-term thinking and strategies. In the longer—term this can lead to better organisations as there is a shift to long-term strategies. Impact investment can lead to a more sustainable economy.
The disadvantages of impact investing
There are claims that impact investment does not yield an adequate return, even over a period of years. There is some controversy over the returns on impact investment. There are those who claim that it leads to greater financial returns. However, on balance, the evidence would suggest that impact investing does not earn as high a return on capital as traditional investing. Once social and environmental impact is prioritised the chances are that the financial returns will not be as significant as a traditional investment.
Impact investment means prioritising environmental and other factors’, and this can lead to many missed opportunities in investing. For example, it means that investors cannot invest in energy companies when oil is rising in price. Another drawback to impact investing is that it usually means that investors can only invest in companies with strong environmental and social responsibility policies. As a result, there are only a limited number of companies that are suitable for this form of investment. Moreover, it is often the case that many companies are reporting that they are meeting targets, for example, on carbon emissions but in reality, they are not. Many investors who believe that they are allocating capital to environmentally- friendly companies are mistaken.
It is important that anyone interested in impact investing do their research and make sure that it is best for them.