There has been a lot of buzz about impact investing ranging from “Impact investors are perpetuators of a broken system and power-ridden barons who’d like to create the world in their image” to “they will single handedly change capitalism for the better”. I am of neither opinion and that’s why I decided to pen down my thoughts.
Impact investing is an investment strategy where investors deploy capital with intention to generate positive, measurable social and environmental impact alongside a financial return. Similar to ESG investing and contrary to common perception, impact investing is a lens rather than a separate asset class and can be applied across classes from hedge funds, mutual funds to venture investing.
As with any tool or approach, this too can be used in either a constructive or destructive way: to build a house or tear it down. I believe that impact investing can help build a more inclusive and fairer house and here’s why:
- All About that Bass and FCF — When making investment decisions, investors bank on expectations and what they believe to be the sum of future cash flows and gains rather than solely a company’s current value here and now. Mission-driven companies tend to be more forward-looking and long-term oriented than their counterparts which might prioritize short-term returns of total long-term gains. I think the long-term outlook can help companies be more proactive about threats, resilient in the face of increasing fines and lawsuits and favorable to consumers especially in the era of consumer activism, which will be translated into at par or even greater financial returns and positive net impact in the long term.
- Better, Faster, With more Positive Impact — Through putting money behind products and services and investing in market-based solutions, which by nature of their business models have growing impact with greater scale, we can help more sustainable (in all senses) ideas come to market faster and achieve similar or better results with lower net impact. Especially for time sensitive, mega issues like climate change we need all the wind we can get and as soon as possible. For example, despite controversies around Oatly’s new raise, with better access to capital (although I am still of the opinion that where your $$’s are coming from matters), Oatly can scale faster and help more consumers pivot to a plant-based lifestyle.
- Law of Attraction — Passion attracts passion and especially when it comes to early stage startups, I’d rather invest in a bright and ambitious group of peers, who are determined to solve large, complex problems and create products, services and new models that are better for us, the planet and our societies rather than investing in another Amazon-of-X.
Some might argue that impact investing is
- Inefficient, a sub-par investment strategy given that investors will be starting with a narrower set of companies to begin with and that will yield in lower financial returns according to portfolio theory. Following a similar logic, should we refrain from investing in women or minority founders because the “pool is narrower” and perpetuate the inequality by denying individuals the opportunity to participate in the economy while holding on dearly to our privilege? My answer would be NO as I believe capital can be a positive market structuring force and help level out the playing field while generating positive returns when deployed with intention. Although there are studies arguing for both sides about financial returns of impact investing, it might be too early to tell. The jury is still out.
- Draining nonprofits of much needed grant making money. In the conversations we had with investors when fundraising for our student-led impact investing venture fund, most investors expressed that their donations/philanthropic capital and investments (including investments into impact funds and high-impact startups) were coming out of separate pockets. We need efficiently run, on the ground non-profits more than ever as there are no market-based solutions for advocacy efforts
- Nothing but impact-washing. I agree that there is (and will be even more with growing investor interest) a lot of impact or green washing in the market. Given that impact investing is still fairly new and yet have widely established standards and assuming that there are bad (or misinformed) actors in the market, going all in on impact investing can be detrimental for all relevant parties including investors, startups, consumers and foundations. I believe that we should be critical about how impact is measured, what the tradeoffs are and whether it can be sustained at scale. We should demand more transparency, stricter governance and rigor around our approach to impact and think holistically, considering the impact of our investments across the different dimensions (social, environmental, economic).
- Finally, as put beautifully by Bono when asked about impact investing and Rise, “we have to be a bit modest about where we and be actually a bit tough on ourselves.” The truth is we don’t know yet and we may never get the full picture when it comes to assessing the full impact of our investments (I always get reminded of the trolley problem when thinking about net impact) And, before we start thinking that the world is full of perfect nails, we should take a good look at our hammer. It might surprise us.
Still not convinced/need more data or just not an investor?
In the meantime or instead, you can think critically, keep on asking questions, demanding more clarity and transparency from firms, financial actors and public figures about their investments and actions and just keep on voting — literally by casting votes for leaders that are better for both the people and the planet and with your wallet with every purchase you choose to make.
🎉Shout-out to Zoe Chance and Daniel Epstein, founder and CEO of Unreasonable Group, for the inspiration!
