Impact Investing brings Money Managers and Charities Together

Money managers are realizing the benefits of consulting charitable organizations for specialized knowledge regarding the social aspects of their sustainable investments.

Background

Impact investing is an asset management strategy where social and environmental values are valued as much as financial outcomes. Impact investors carefully evaluate if an investment can reach financial targets but also evaluate them for social and environmental impact. Unlike philanthropy, where decisions are made solely on the social good, impact investing prioritizes financial returns equally. 

Impact investing is a growing field, as investors demand a positive social outcome in addition to a strong financial performance. The increased demand has seen a corresponding increase in supply. Additionally, the field is attracting more women and millennials, both of whom value sustainable investing to a much larger extent. 

Asset management firms are recognizing the need to bring in experts to evaluate the social aspect of their investments. Non-profits involved in the sector have a vested interested in specific social causes, making them adept at identifying the right areas in which to invest.

Analysis

The growing popularity of impact investing has increased partnership between charitable organizations and investors. Investors can take advantage of the charity’s knowledge of good corporate citizenry practices. In addition, good citizenry can also be an indicator of future performance, making it a smart bet for investors Charities benefit from greater awareness for their social cause and an increase of investment funds. Pope Francis recently endorsed impact investing as a responsible option for charitable giving. 

Millennials are increasingly concerned with their social and environmental impact on the world around them. Investing with sustainable goals allows them to combine their interests, resulting in profits with purpose. Mutual funds have found this to be an important growth area and are creating funds with a socially responsible orientation. The social aspect has led to a strategy of fund managers avoiding investments in industries deemed “unethical”, like alcohol, tobacco and guns. 

As impact investing becomes mainstream, there is a greater incentive for companies to be on their best behavior. Companies that are found to be engaging in unethical practices already risk alienating consumers. Now, this alienation can extend to investors with the risk of being excluded or removed from mutual funds indices focused on sustainable investing. 

While impact investing is being lauded for its ability to combine finance with giving, critics take a different view. Sustainable investing allows people with wealth to improve the system but by ensuring an equal focus on financial performance, these investments reinforce the existing system of economic injustice. By evaluating a social cause for its ability to produce profits, the root cause for the broken system does not always get addressed.

Assessment

Our assessment is that impact investing has its merits. We feel that the trends of marrying social good with financial returns can be advantageous for society as a whole, especially when consulting with charities that can provide specialized insights. Despite the failure to fully address the causes of social evils, the growth in sustainable investing tells us this too can be addressed with a better approach to solving the underlying problem, rather than just the system.