Impact Investing for Real Impact?

This year’s Climate and Society class is out in the field (or lab or office) completing a summer internship or thesis. They’ll be documenting their experiences one blog post at a time. Read on to see what they’re up to.

Yimeng Xu, C+S ’18

The idea of impact investing was born in part at the intersection of climate change and sustainable development. It is an innovative approach that leverages financial tools to achieve sustainability and doesn’t focus solely on the potential financial returns on any investment. When institutional and individual investors invest their money, they take social and environmental impact into consideration as part of their investing decisions. This kind of investment provides a more comprehensive and eco-friendly investing standard for investors.

Impact Investing is a fast growing field. It was publicly recognized in 2007 for the first time during a meeting held by Rockefeller Foundation in its Bellagio Center in Italy. With the changing climate and the social issues around the world, more and more investors are eyeing investments that are beneficial for society and the environment. Now, almost all the business schools in U.S. offer courses on impact investing and numerous financial institutions are involved in impact investing.

Through my summer internship, I got the chance to explore the world of impact investing working with Earth Institute at Columbia University.

Columbia University in the summer (Source: Yimeng Xu)

A large portion of my internship was to help write a chapter on impact investing. I made efforts in gathering information and drafting write-ups about the history, evolution and innovations as well as challenges of impact investing. Although I had taken a course on corporate sustainability during my second semester, I found it a lot more challenging to communicate the concepts I had learned. Even though I have understood the concept of impact investing, it takes efforts to explain what the concept really means and why it matters.

The Global Impact Investing Network, one of the foremost organizations working on the topic, defines impact investing as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.” If the intention is put on a spectrum, impact investing lies between the two extremes of profit-making only and grant only.

But is impact investing solely about intent? What if a venture aims to be socially beneficial but isn’t in practice?

Measuring social impact is a big challenge. Unlike the financial returns which can be measured through amounts on balance sheets, there is no direct numeric representation of social impact. Even though there are evaluation systems such as the Impact Reporting and Investment Standards and Global Impact Investing Rating System to help self-measure the social side of impact investing, there is no perfect tool to objectively measure the social impact of all activities. So investors look at these metrics and scores critically when they intend to make investment decisions based on these evaluation systems.

In climate studies, we always talk about timescales. This is true for impact investing as well. Let’s say a venture is making a solid contribution for social well being but in later years, it fails to make the impact. A lot of ventures can only be profitable in longer time periods. Many believe that investors who are risk-intolerant and expect short-term returns would not be too keen on impact investing because of the nature of impact investing, which usually focuses on long-term programs with a higher risk compared with traditional investment.

Yet, all investments have risks and variations over different timescales. Just like ordinary investments, there are different forms of impact investing which may accommodate investors committed to seeing returns for different timescales and needs. For instance, the projects implemented by government and private sectors through social impact bonds are large-scale investing. The funding for local farmers through microfinance is small-scale investing.

I used to consider impact investing to be a business focused less on profit and more philanthropy. My understanding of it has slightly changed through my studies and internship. I now believe that in most cases, socially beneficial investments ought to be more aggressive in profit making than traditional investments. If the investments are successful, the confidence for impact investing in the global market would then be elevated. Being a type of investment, impact investment still needs good financial performance to involve more stakeholders.

DBL Partners, one of the major early investors of Tesla embraces a “no sacrifices” approach in its $400 million impact fund. This approach is to achieve investments with positive social, environmental or regional economic impact without compromising financial returns.

The success of impact funds like DBL Partners can motivate impact investors and help impact investing become mainstream in the financial market. Looking at a larger picture, profit sustainability is part of sustainability. All the environmental and social issues require financial support. Researchers need funding to conduct studies; governments need money to study and implement social policies; companies need revenue to put into research and development. A successful impact investment should never give up on financial sustainability. Most graphic representations tend to illustrate the impact and investing on two extreme to demonstrate the spectrum of intention. Personally, I believe that making an impact and making profits are not a tradeoff to each other. In impact investing, lowering profit demand never means sacrificing for greater impact. A good investor should be able to maximize both impact and profit. The real tradeoff is the allocation of a fund. If the investors are now allocating more capital towards impact investments, there has to be a good reason for it.