Impact Investing: Achieving Both Financial Returns and Social Impact

For many investors, simply making returns on their investments to be profitable is already quite a difficult task, so it’s only logical to assume that trying to achieve sustainable impact on top of that is nearly impossible. However, it is possible to achieve both financial returns and sustainable impact. In fact, for longer term investing, many argue that the 2 are somewhat associated; thus, investing for sustainable impact may result in financial results. In this Founder’s Thought, we will explore common myths of “Sacrificed Returns” and how to invest for sustainable impact or conduct impact investing.

Debunking Myths

As mentioned earlier, a common assumption is that impact investing, which looks to achieve sustainable impact through investment, often results in investors being forced to accept lower financial returns. In fact, many critics argue that prioritizing a cause through impact investing might come at the expense of the profitability of the investment. However, studies challenge this assumption, arguing that impact investing can be extremely profitable. In fact, a 2020 study conducted by the Global Impact Investing Network (GIIN) argues that most impact investors reported financial performance similar to that of non-impact investors, which challenges the assumption that impact investing sacrifices returns.

Strategies for Dual Success

To achieve success in both, achieving sustainable impact and maximizing returns when investing, the most important step is to clearly identify your goals. By identifying your goals or specific causes you want to support, such as clean energy, women empowerment, and racial diversity, you can start to analyze companies in a lens that will reflect both their financial viability and their ability to uplift your causes. This lens is the foundation for impact investing. Since companies are traditionally evaluated for their financial viability, adding another lens of analysis can be difficult. However, there are multiple tools that can be used to understand how a company is moving towards sustainable impact. The easiest to use are ESG Risk scores although they do have their pros and cons as discussed in a previous Founder Thought, titled “Impact Investing: Evolution of Environmental, Social and Governance scores”. ESG Risk scores can help provide investors with a surface-level idea of how a company is moving towards sustainability. However, to dig deeper, I would recommend investigating a company’s annual report and sustainability report amongst other publicly released information on a company’s actions.

Conclusion

Overall, impact investing seems too good to be true. You can experience strong financial returns without sacrificing your ability to make a sustainable impact on the world through your investment. Yet, getting the hang of impact investing can be challenging; thus, it is important to change your perspective when analyzing companies to make it easier to identify opportunities for dual success.