Does this capitalist world make you angry? Do you feel that humans should be more empathetic? Do you ever feel that people who donate their money should be rewarded?
Well, what if we could create a mechanism of rewarding charity within this capitalist world?
Don’t worry, this sort of a mechanism already exists! Well, hear about impact investing! Impact investing means investing in companies that have a net positive impact on society at large and also generate a reasonable profit while they do so. In simple words impact investing = charity + returns. It’s a growing sector for global investment that gained prime focus in 2012 and has been expanding ever since.
How does Impact Investing work?
The impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education. There are various funds having different combinations of companies as per your need. For example - there might be a specific fund which only invests in medical companies worldwide to make a positive effect in the medical sector. Similarly, there might be a fund with a combination of companies that provide products that don’t use plastic at all or maybe are vegan in nature. And besides these, there are funds that contribute to all the sectors instead of choosing a particular sector. The possibilities are endless!
Better than charity?
Think about this, since most charities don’t have a profit motive, they don’t have the incentive to maximize their efficiency and this often leads to mismanagement of funds, whereas big charities have a dedicated department to manage their funds but servicing this department itself takes up a big portion of the donations and hence maximum efficiency is not possible and most of the times the full potential of the donated funds is not realized. Impact investors on the other hand identify companies with a profit motive that has a positive effect on society and hence it ensures that the funds will be used to their maximum extent for benefitting the society and also provide some reward for the investor in return. This return in turn motivates the investor to invest further, thus compounding the net benefit to the society. It is a win-win situation!
ESG ratings
Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that impact investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Impact investors may consider a company’s ESG rating before investing. Most mutual funds in the global market now provide a chart of ESG rating so that the consumers can make a conscious choice before investing in companies to maximize their impact in the sector they like. ESG rating also takes into consideration the potential threats the companies might face in the environmental, societal, or governance avenues as discussed before.
If someone wants to make their own investment portfolio, an ESG rating is a good factor to take into consideration.
Conclusion
In a nutshell, Impact investing is a great way to help the society that supports companies while making some reasonable returns. Some might argue that it’s a growing trend and is supported by hype rather than strong fundamentals and it might not be able to sustain itself in the long run. The counterpoint to this is that businesses involved in good ESG practices have much lower overall risk due to strong compliance and good ethical standards which are healthy practices that help a firm sustain itself in the long run. Nevertheless, one should never put all their eggs in 1 basket, diversification is the key to making good returns in the long term, so one should not rely completely on impact investing yet, but consider it the next time they feel like doing a philanthropic deed.
