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Impact Investing

January 1, 2020 | Commentary

  • Socially Responsible Investing (SRI) has evolved through the years in many ways.  Environmental, Social and Governmental (ESG) screens try to identify passive investments that perform well across several dimensions.  Impact investing has emerged to be a more direct way to marry social objectives and economic returns.
  • Impact investing is any activity that has an investment thesis oriented specifically to achieve a social objective.  Finance theory and available empirical evidence tells us that one should expect at least somewhat lower returns.  If higher returns occur, they will be from taking on different and incremental risks that could reverse and disappoint in the future.
  • Examples of impact investments include micro-lending programs to provide financial resources to poor communities and developing countries, private equity programs to finance clean water facilities, and investments to promote clean energy or sustainable forests.  The range of opportunities, however, can cover any mission, limited only by the practicality of creating programs to execute against those goals.
  • Billions of dollars are flowing into the ESG and impact spaces.  Fund and partnership providers see this and try to meet demand.  Sometimes this is with genuinely responsive offerings.  Too often it is with slight modification to and relabeling existing products in a process sometimes referred to as “green washing” designed to give them more marketing appeal.
  • Measuring the true impact of one’s investments is the biggest challenge.  It is necessary, however, to evaluate whether any give up of return was worth the effort of tying together social and economic goals.  At some point it might be preferable to pursue a value-aligned traditional portfolio and use the returns to pursue independent projects designed to achieve the desired social impact.

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