The blog was first published at ArcticStartup.com.
The phrase “impact investing” can often be heard in the investment community.
It features in most new funds’ marketing communications and many claim their investment activities have some form of impact or another. In a way this is true. All investments do have an impact. When money leaves an investor’s pocket it will always set in motion a chain of events that leads to an impact.
The impact can be small or big, positive or negative, intentional or unintentional. However, the form it takes and how big it actually is/was is rarely fully understood. But there will always be an impact and this is sometimes causing confusion when talking about impact investing.
Many investors think impact investing is the same as following ESG (environmental, social and governance) guidelines. Following ESG guidelines is the minimum requirement for a business to be called sustainable. One could argue that ESG is about minimising the harm done to society and if no harm is done, then it must be good. But to actively pursue a positive and measurable impact with investing is something that should really be called impact investing – and sustainable investing.
A further step is a goal of measuring and maximising the positive impact achieved with any invested euro. On the “hardcore” side of impact investing is the concept where the core of the business itself is generating an impact and the cash flow is directly connected to it. The impact has been monetised and will provide incentives to both the entrepreneur and the investor. This can be accomplished for example with payment-by-results contracts combined with impact-value- sharing investor agreements. Impact investing can be seen as a spectrum where ESG-compliant investing is at the one extreme and monetised impact is the other, with several variations in between.
Financial instruments do not necessarily have to be complicated. Social impact bonds (SIBs) are often tailored and require a certain amount of complexity by default. However, impact investing can be done with the normal set of financial instruments available to any investor: equity, loans and convertibles. The impact can be built into the instruments (financial returns depend on measured impact) or into the governance of the company through impact clauses in shareholders’ agreements or financing agreements.
There are studies that show strong financial performances of impact investment funds. In some cases, they have already outperformed conventional funds. This is actually quite easy to understand as impact investment funds invest in companies that address problems that are found in our society.
And it is usually a good thing financially if one is able to meet a customer’s needs. Many fund managers have already noticed this opportunity. Impact investment assets worth some $77 billion were under management at the end of 2015, according to the Global Impact Investing Network’s (GIIN) annual survey.
Social impact investing is seen as a huge market opportunity for the future. When compared to other fields where impact investing is emerging – environmental and development aid for example – social impact investing has one advantage from an investor’s perspective. The public sector is struggling with budget deficits and social challenges that cause huge direct and indirect costs for taxpayers. Solving these challenges means actual monetary savings and new opportunities for social impact investing. Just to get an idea of the business potential in Finland alone, public procurement is worth about 35 billion euros per year. It is a huge market.
Sitra is heavily present in Arctic15
- On day one of the conference (2 June), Sitra is hosting a “Why Invest in Social Impact?” session, starting at 2.40 p.m. On the stage will be Rodney Schwarz, CEO of ClearlySo in the UK and Ruth Brännvall, CEO of Impact Invest Scandinavia, among others. There will also be pitch presentations from the three best impact start-up companies from Sitra’s Impact Accelerator 2016.
- On the second day (3 June), there will also be a workshop for start-ups about impact investing starting at 11 a.m.
- Sitra Impact Accelerator will be present at Arctic15 on both days at stand 26.