The primary goal of social impact investment is to address societal and environmental challenges by using capital to create measurable, positive outcomes for both people and the environment.
SOCIAL IMPACT INVESTMENT - SII
Social Impact Investment (SII), also known as Impact Investing, is an approach to investing that seeks to generate positive social and environmental impact alongside financial returns. It is fast becoming one of the world’s most significant investment trends, and in Australia, it is expected to be worth around $500 billion by 2025.
The primary goal of social impact investment is to address societal and environmental challenges by using capital to create measurable, positive outcomes for both people and the environment. This synergy between addressing societal and environmental factors and having access to financial investment makes SII attractive for many not-for-profit and social enterprise organisations.
The Rise of SII
SII investing evolved from socially responsible investing (SRI), which escalated in the 1960s when anti-Vietnam War activists lobbied for universities to screen out defence contractors from endowment funds. SRI sought to exclude unethical or harmful investments like tobacco and fossil fuels.
From the mid-2000s, as environmental, social and governance (ESG) factors began to take priority for consumers, businesses, and boards, SRI, while helpful, was limited by its emphasis on avoiding harm.
The advantage of Impact investing is that it is more closely aligned with the ESG responsibilities of businesses and brands because of the focus on investments creating measurable positive and social impacts as well as generating a financial return. Stephen Fitzgerald, an independent non-executive director of insurance company QBE, says;
“Rather than just trying to reduce the negative impact of investments you have made, [impact investing] is proactively looking to have a net positive impact, or net positive externality, as well as delivering mainstream returns.”
Benefits of SII
This emphasis on SII seeking to balance investment return with a positive impact and an organisation's ESG responsibilities means it has some distinct benefits for companies.
1. Positive social and environmental impact
The core advantage of SII is its ability to drive positive change by addressing pressing social and environmental issues. This can include areas such as clean energy, affordable housing, healthcare, education, poverty alleviation, and more. For example, it has been used for
- An organisation that researches cures and treatments for diseases.
- A company that rents out affordable housing.
- A bank that provides micro-loans to disabled entrepreneurs [1].
2. Alignment with Values
SII investors often have specific values or causes they care about deeply. Impact investment
allows them to align their investment decisions with personal or organisational values,
fostering a sense of purpose and the satisfaction of contributing positively to society and the
environment.
3. Financial Returns
While the primary focus of SII investment is on creating a positive impact, it's important to
note that financial returns are still a significant consideration. Impact investments aim to
generate competitive financial returns, which makes them attractive to a broad range of
investors.
4. Innovation and Scalability
SII investing encourages innovation by funding projects, companies, and organisations
creating new solutions to societal challenges. Successful models can be scaled up to have an
even greater impact.
5. Leveraging Capital
By directing investment toward socially and environmentally impactful projects, SII investors
contribute to filling gaps that traditional philanthropy and government programs might not
address fully.
6. LONG-TERM PERSPECTIVE
SII investors often take a longer-term view of their investments, focusing on sustainable growth and lasting impact rather than short-term profits. This can align well with creative solutions that require time to show meaningful results.
7. RISK MITIGATION
Investments targeting social and environmental impact often involve risk mitigation strategies. For example, building strong relationships with local communities, fostering transparency, and considering broader stakeholder perspectives.
8. ACCOUNTABILITY
Impact investors typically emphasise measurable outcomes. This encourages rigorous tracking and reporting of investments' social and environmental results, enhancing transparency and accountability.
9. COLLABORATION
Impact investing often involves collaboration among stakeholders, including investors, NGOs, governments, and local communities. This collaborative approach can lead to more holistic solutions to complex challenges.
It is fast becoming one of the world’s most significant investment trends, and in Australia, it is expected to be worth around $500 billion by 2025.
Although impact investing has many benefits, it is essential to note that it has challenges. Some of these challenges and risks which must be considered include:
1. The challenge of accurately measuring and reporting the impact
Assessing and measuring investments' social and environmental impact can be complex. Determining whether the intended outcomes have been achieved accurately is challenging, and inconsistent reporting practices make comparing and evaluating different investment opportunities difficult.
Avoiding "impact washing" (superficial claims of impact without evidence) and addressing potential conflicts between impact goals and profit motives are some of the complexities that impact investors must navigate.
2. Balancing trade-offs between impact and financial returns
Striking a balance between achieving positive social impact and generating competitive financial returns can be challenging. In some cases, investments prioritising impact may yield lower financial returns than traditional investments, leading to potential conflicts for investors seeking both.
3. Lack of StandardiSation
The lack of standardised definitions, metrics, and frameworks for measuring impact can lead to confusion and greenwashing (exaggerating the positive impact of investments). This lack of standardisation can hinder transparency and trust within the industry
4. Market Risk and Performance
Like any investment, social impact investments are subject to market fluctuations and economic uncertainties. The focus on impact does not eliminate these market-related risks, and investments may still experience financial losses.
5. Limited Investment Opportunities
The pool of suitable investment opportunities may be limited depending on the specific social or environmental criteria an investor seeks. This could lead to reduced diversification and potentially increased risk exposure.
6. Potential for Mission Drift
As investment strategies evolve over time or face financial pressures, there's a risk that the initial social or environmental mission of an investment may be diluted or compromised (mission drift). This can occur if the pursuit of financial returns takes precedence over impact.
7. Regulatory and Legal Risks
Social impact investing involves navigating complex legal and regulatory landscapes.
In some cases, investment strategies may face legal challenges, especially if they involve
unconventional financial structures or require compliance with specific impact
standards. These legal challenges may cause investors to be risk-averse.
8. Longer investment horizons
As mentioned above at point 6 of the benefits of SII, some impact investments may require longer time horizons to achieve their intended outcomes. While this can be a positive for creative solutions that need a longer time frame to achieve results, it can also lead to liquidity problems and limit investors' ability to reallocate their capital to other investments.
9. External factors
The success of impact investments can be influenced by external factors beyond an investor's control, such as changes in government policies, technological developments, or shifts in public sentiment.
To mitigate these risks, investors interested in social impact investing should conduct thorough due diligence, seek expert advice, diversify their portfolios, and stay informed about impact measurement and reporting practices developments. It's important to carefully evaluate each investment opportunity's potential positive impact and financial risks.
All organisations, not-for-profit. social purpose or otherwise, at some point, will need external funding to enable them to grow further. Government grants, mainstream banks and financial institutions, traditionally the first point of call for this funding, is not a route open to many social purpose or not-for-profit organisations.
Traditional financiers may be unable to fund unproven business models and organisations without a profit-making track record. Also, certain financiers may require a minimum level of financial performance to be met before considering investing.
However, with the growth of the impact investing market in Australia ($1.2 billion under-investment in 2015, potentially growing to $500bn in 2025), many social purpose organisations are now finding impact investing is a potential solution to their funding requirements.
