Impact investing is investing with the intention of generating measurable social and environmental impact along with financial return. It stretches across ESG-compliant assets to direct investments in marginalized communities. Over the years, impact investing has become popular among investors. They are drawn towards assets that will achieve a dual purpose, that is, desirable financial returns and positive social and environmental results. Investors also desire to be seen as one of the “good guys” so they draw their focus towards impact investing. As desirable as it may seem, concerns arise that impact investing may be compromising traditional performance metrics and investors are substituting profit for purpose.
Proponents of impact investing debate that companies that practice impact investing tend to perform better than traditional companies due to low risk exposure, better governance and alignment with future-facing industries. However, skeptics are critical toward this trend because the metrics used are often subjective and lack standardization. For instance, a company may be included in one ESG index but is excluded in another because the rating methodologies often rely on inconsistent criteria that make it difficult for investors to compare ESG ratings across providers. Reduced diversification because they focus more on certain sectors such as renewable energy. High fees due to specialized screening processes such as extensive data analysis, third-party verification and constant updates to keep portfolios aligned with evolving ethical standards. In some cases, capital is directed toward ventures with strong ideals but weak fundamentals such as unproven business models and poor cash flow. Such limitations undermine trust and raise concerns about whether impact investing is being over-exploited. Younger investors are also embracing impact investing strategies, foregoing high potential returns for value alignment.
Some investors have managed to integrate impact investing with traditional investing by making sound decisions based on ability for measurable impact and strong earnings. However, it requires rigorous due diligence to ensure that the business is as strong as the social objective. Clear, verifiable impact metrics aligned with global standards such as Impact Reporting and Investment Standards (IRIS) and Global Impact Investing Rating System (GIIRS) and a long-term investment target with a thirst for volatility and innovation in sectors such as renewable energy and affordable healthcare. Engaging in shareholder activism by compelling traditional firms to embrace sustainable practices which will create impact within high-performing companies.
Impact investing has enlightened the investor’s role in conserving the society. However, investors must question whether their capital is creating change or are they victims to a well-marketed scheme. Integrating impact investing with traditional investing requires essential elements such as discernment, transparency and willingness to question virtuous claims. In today’s market, impact and performance are very important and essential.
