Socially responsible investing, part 2: What you need to consider

Impact investing is on the rise. Investors are increasingly looking to businesses to address societal issues. Previously less accountable, businesses are now taking a proactive approach to addressing societal issues while delivering shareholder value.

In the early 2000s, the Millennium Development Goals (MDG) were released by the United Nations to address some of the largest issues delaying the development of communities across the world. The goals were widely considered to be unsuccessful. A key component was missing at the table: private enterprise. This stakeholder was subsequently incorporated into the sustainable development agenda, culminating in the United Nations Sustainable Development Goals, which supersede the MDG and place accountability on both the private and public sectors. 

 

Addressing systemic issues like climate change, inequality, gender imbalances and poverty requires effort from multiple stakeholders. Philanthropy, government intervention and grass roots movements have previously been the dominant means to raise awareness of societal issues. However, funding constraints and election cycles have limited the durability of these efforts. At the same time, large corporations historically tend to focus their efforts on managing their own social performance, with few leading the way to facilitate meaningful change.

The role of impact investing

This is where impact investing comes in. Small- to medium-sized businesses began to emerge, identifying the need for a new sector to deliver goods and services while fulfilling a broader environmental or social mandate. The investment community took notice and aptly dubbed investments in these businesses as impact investing.

 

The Global Impact Investment Network notes $114 billion in impact assets, globally, as of May 2017. This trend continues as more talented entrepreneurs identify underserved market and consumer segments. Affordable housing, organic foods, clean technology and women- or minority-led businesses are some examples of typical impact investments.

Impact investing 101

A primer for those interested in this investment category: 

  1. Impact: A common theme for each impact investment is an intentionality to have a meaningful environmental or social impact. Companies typically communicate this intentionality in their mission statement.
  2. Measurement: To support their impact intentionality, social impact companies should provide some form of impact measurement for their investors. Some will use stories or case studies, while others will take a more quantitative approach.
  3. Returns: The targeted return will vary depending on the fund’s impact thesis. Some funds will target returns at or above market, while others will intentionally provide concessionary returns in order to provide capital to an underserved beneficiary. It is important to understand how the targeted investment views return, and to seek those that align with your expectations.
  4. Risk: The risk profile of impact investments is in line with traditional private investments. Illiquidity, longer investment horizons and information asymmetry are risks that are shared between traditional and impact investments. It is important to understand these risks prior to making any private investment.

Keep the conversation going

Which environmental or social impacts do you care about? Share a recommendation of a company that addresses this impact through their business model.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Imran Jiwa, CPA, CA

Imran is the director of impact and finance at Active Impact Investments.