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Jun 21, 2017

Investing for Impact Needs to Mean Something

The investing world is awash in stories about how “impact investing” has gone mainstream.  Investment firms are touting market rate returns and claiming an investor can do good without sacrificing financial gain.

Their use of the term “impact investing” is a far cry from what the originators of the term meant, which is investing to create a social return and a financial return.  Rather, the investment community is using the term to refer to investing in “good” companies.

There has always been a class of investors who want to apply a filter to the companies in which they will invest.  Those filters are generally related to the product or corporate behavior of the company.  The most common filters are called socially responsible investing (SRI) and Environmental Social Governance investing (ESG).  These filters are not related to the creation of measurable social impact by a company.

SRI began decades ago, largely to help investors avoid investing in industries they were opposed to.  Firearms and tobacco were the initial filters.  Investment funds, even stock indexes, were formed that applied these filters.  Some SRI funds now exclude high-polluting industries or other environmentally harmful businesses.  This is a negative filter because it identifies businesses to exclude from investment.

ESG began more recently as a more positive filter, to favor companies for investment.  This category is also called sustainable investing and the investment research firm Morningstar has begun to provide institutional investors with sustainability ratings that are essentially ESG filters.  Under this approach, an investor can see two scores for a company, one that scores its financial performance and one that scores its sustainability or ESG performance.

An entire industry of investment and analytical firms have emerged to connect their work to as many popular phrases as possible.  As Morningstar says in its Sustainable Investing Handbook, “Terms like ‘responsible investing,’ ‘sustainable investing,’ and ‘ESG’ are used in similar or even interchangeable fashion. An even newer term is ‘impact investing,’ which refers to attempts to measure the positive environmental or social outcomes of a given investment.”

Impact investing is not a new term, but it has been expropriated by the general investment community as a marketing term that sounds more appealing than ESG and more specific than sustainable investing.  This trend is making it more difficult to distinguish investment in companies that are committed to creating social impact, which we call social enterprises.

Consider two companies, A and B.  Both have the same level of sales and similar balance sheets, but A is ESG while B is a social enterprise.  From that similar economic mix, Company A has profits of $2 million.  Company B has similar operations but also puts a meaningful proportion of its resources into creating social impact, such as through training and employment of formerly incarcerated individuals or individuals with disabilities.   As a result B’s profits will be less than A’s and the investor will not get the same financial return.

Sustainable investing doesn’t consider social impact created by the company.  And, sadly, many “impact investment” funds don’t either.  If you choose an impact investment fund, be certain that it isn’t just a marketing term but rather is a fund that puts money into social enterprises that create meaningful impact.

If you want to learn more about social enterprise and to get to know the Central Ohio social enterprise community, come to Positioned to Prosper on August 15 from 5pm to 6pm.  At this free event you’ll meet people, learn the substantial progress in our community the past year, and hear about many new ways we can help you to engage with this exciting sector.

Want some ideas on how social enterprises create good?  Go look at the social impact profiles in our social enterprise directory.  Want to attend some more events featuring entrepreneurship in Central Ohio?  Check in regularly with our event listing.  Want to learn more about social enterprise and how it uses business to create positive change in our community?  Follow our blogtweetsFacebook, and webpage.

Allen Proctor, President & CEO

Center for Social Enterprise Development