This little joke, in the form of a sensationalist report, in a tone that seems like a publication from the newspaper “O Incredible”, is a truth that is unavoidable today, but which, a few years ago, could have seemed like a science fiction scenario. According to the GIIN (Global Impact Investing Network – a non-profit organization, responsible for creating the largest global impact investment network, and which has been promoting and supporting the development of this ecosystem), in 2022, the dimension that of the impact investment market was 1.164 trillion dollars, and is expected to increase in the coming years.
In fact, according to a study by Cambridge Associatesa recognized investment consultant, 40% of the institutions that were analyzed will opt for a sustainable investment strategy, or impact investment, in the next 2 years.
It is also interesting to note that, according to the GIIN, there are 2 areas in the impact investment market that are expected to become prevalent: the first, investment in Green Bonds (debt instruments that finance projects with positive environmental benefits, whether these projects are public or private) and, secondly, the growth of Corporate Impact Investing – that is, the intensification of investment by companies, not only in products and areas that generate financial returns but which, at the same time, also generate social and environmental impact. And it can either be an investment in external start-ups, in investment funds aligned with ESG, or it can be the development of products, services and internal projects, in a logic of intra-entrepreneurship, which simultaneously manages, financial return and impact – this is the heart of “Corporate Social Innovation”.
Talking about impact investing these days includes many types of investment and models that have been developed over the last 15 to 20 years. But this phenomenon of a new investment paradigm dates back to the last century and includes, as Cap Gemini rightly points out, in its Paper, released this year, on Impact Investingfrom Responsible Social Investment, which was born around the 1970s, through the so-called ethical investment, which already uses, in screening from markets to invest in, more elaborate sustainability standards, to ESG investments, this trend that we are currently surfing and which, in the case of Europe, has a strong push from the recently approved ESRS regulations, with the standards of report non-financial and the inherent adaptations that companies will have to carry out.
In summary, we can say that the Impact Investor is one who seeks, in addition to the financial return on investment, the creation of sustainable and measurable value for society, whether that value embodied in improvements in people’s quality of life, or in the preservation of natural ecosystems and the protection of resources that guarantee life and, of course, production, in the timeline.
For a more comprehensive perception of the difference between this type of investor and the so-called “traditional investor”, seeking a simplification that, naturally, loses the texture of the nuances and the gray ones, but what helps understanding, we can say that the latter:
- Its main objective is to maximize financial return;
- Its main focus is on short and medium-term financial performance, still very much anchored in the traditional economic postulate of the “time value of money”, according to which there is a greater benefit in receiving a certain amount in the present, essentially for 2 reasons: firstly, due to the Opportunity Cost – money received today is money that can be reinvested and multiplied, so it automatically becomes worth more than if it remains invested; secondly, due to the risk of default – that is, of not receiving payment, in the long term, due to an unpredictable change in environmental circumstances, or those related to the invested business itself;
- The criteria that underlie investment decisions are purely and simply financial – risk analysis, ROIs (investment returns), liquidity and other factors;
- and, finally, they can take into account the greater or lesser social responsibility and impact of the invested institutions, but that is not their priority.
Impact investors, in turn:
- They have the ambition to generate a double return on their investments – financial return and measurable social or environmental impact. Then the degrees of one and the other of the factors vary, with some looking for this double or triple bottom lineaccepting to receive a lower financial return, but there are also – the majority – those who have the ambition to achieve competitive financial return conditions, in line with the traditional market, and even above the market.
- Because the social and environmental transformations that they seek to accelerate with their investments are, as a rule, changes that take some time, the results they expect are long-term, which is why this type of investment It is often called “patient capital”. This type of investment exists a lot, due to the type of context of preserving a system, which is sought to be prolonged over time, for several generations, in family businesses, for example.
- And they base their decisions on financial data analysis, but also on reports sustainability and impact metrics, which measure not only the reduction of risks in the core activities of the invested companies, but also the investment made in generating solutions to problems real of stakeholders and surrounding communities.
But does this mean that some are “the bad” and others “the good”? No. I don’t believe that. I believe that they are different investment strategies and that, regardless of value judgments about quality or goodness, which I do not think I need to comment on in this context, they generate different results.
But yes – it’s good to be aware of this, to make investment decisions with real awareness. The clear awareness that there is a direct causal link between where we choose to put our investments, and what happens as a result of that:
A constant and consistent focus on maximizing profit, without considering these other impacts (environmental and social), will certainly generate an accelerated drain on resources, an increase in the gap between those who invest and those who work for a living, social upheavals, and other imbalances that we don’t need to imagine, because they are right in front of our eyes. This is not a matter of prophecy;
On the other hand, investment in the preservation of ecosystems that guarantee production and our subsistence, in the well-being and development of people, and in the adjustment of harmful and value-destroying commercial practices, even if does not generate an anticipated financial return, it will guarantee that, in the future, there will be a return to be received. Whatever it is.
I would say that it is, therefore, not a difference of good or bad. It is purely and simply a choice between investing in what destroys value or, conversely, in what creates value. And when we talk about value, here, we talk about more than money. We talk about the real quality of life of people and their systems and ecosystems, which guarantee life.
But, even within the logic of pure financial return, it is important to look at the numbers, and understand if the Impact Investing whether or not it offers competitive conditions in relation to the traditional investment market.
Again according to the GIIN, and its report with Insights for the year 2023, 74% of the sample of companies that were the target of its surveys, between 2018 and 2023, expect to obtain, with their impact investments, a financial return similar to that of traditional financial markets. Of the 308 investors included in this sample, who manage a total of 371 billion dollars in impact assets, 79% stated that the financial performance of the investments made in 2023 was equal to or greater than the objectives set, with 88% of these companies saying that they achieved met or exceeded their impact objectives.
In Portugal we already have very good examples of initiatives that are focused on carrying out impact investments in a consistent and well-structured way, although relatively recent – such as MAZE or the Ageas Foundation. But there is still a lot of room to grow, and it is also necessary, for this to happen, that companies definitively embrace this wave, and social innovation surfers build solid boards, and professionalized models of impact.
There’s a new investor on the block. The only thing that’s special about it is that it makes a simple calculation of 3 – without resources, there is no life and, therefore, there is no profit. Without profit, there is no development (at least in the system we live in now). But if the profit is not applied to preserving resources and quality of life, development is useless. Or does it work?
