The Rise of Social Investing in Today’s Society
Social investment is the philanthropic response to the quote, “Give a man a fish, and he eats for a day; teach a man to fish, and you feed him for a lifetime.”
All investors seek a return on their investments, but for those involved in socially conscious investing, the return hoped for is both financial and in the form of societal benefits.
Largely developed as a response to philanthropic practices that are thought to be unsustainable, social investment is a marriage between donations and investment, and it is beginning to play a larger role in society.
Most Popular Areas for Social Investing
There are a wide range of industries and segments for socially conscious investors to invest in. The most popular of these areas include:
- Environment matters
- Human rights
- Moral issues
The environment, particularly concerning energy development, efficiency, and consumption, is one of the most popular areas for social investing.
With concerns about climate change, air and water quality, and the health impacts of a polluted environment playing a larger role in our world, the environment has become a focal point for those involved in socially conscious investing.
Listed below are examples of environmentally conscious social investments.
- Renewable Energy: Investments in companies involved in the production of renewable energy is a very popular eco-investment. This includes companies involved in energy production through solar power, wind turbines, and the companies that produce the materials needed by these industries.
- Energy Storage: Social investment in companies that develop ways to store large amounts of energy (from renewable sources) is also a popular investment, as are fuel cells needed in hybrid vehicles.
- Building Efficiency: These are companies that develop energy-efficient building materials.
- The Eco-Living Sector: These investments cover sustainable and healthy living practices, including organic food and non-toxic health care products.
Socially-focused investors may choose to support companies that promote human rights or seek to improve the quality of life for people everywhere.
Examples of social investing for the promotion of human rights include:
- Fair Trade: Impact investors interested in promoting human rights worldwide often invest in companies involved in fair-trade practices. An example of promoting fair trade would be providing capital for a coffee cooperative in South America. A portion of revenue from the business is reinvested into the local community of the farmers in the form of reforestation projects and other actions to improve the living conditions and local environmental health.
- Low-Income Housing: The construction of affordable housing in areas of need is a frequent focus for impact investors.
- Access to Clean Drinking Water: Climate change and growing development are decreasing access to clean drinking water in much of the world. Impact investors may choose to invest in companies that are seeking new and innovative ways to treat water and improve access to clean water for communities in need.
- Clean Energy Access: Impact investors frequently invest in companies that not only produce renewable energy but increase its availability to areas with low access to energy.
One socially-minded investor is often quite different from another since ethics vary across people. Using abortion as an example, some socially conscious investors may choose not to support companies that have a pro-choice objective (such as an abortion clinic) whereas others may feel positively about its role. The determining factor in an organization’s social benefit is always the opinion of the investor.
Morally-minded investors often avoid the following types of companies:
- Fossil fuel development
- Fast food
- Weapons manufacturing
- Military spending
Regardless of an impact investor’s leanings, the basics of investing—returns, measurements, etc.—remain the same.
How Social Impact Investment Measures Up
Impact investors have a wide range of expectations regarding financial returns: some don’t mind little financial return if it means a larger societal return while other impact investors wish to see market-rate returns on their investments. Either way, a survey conducted by GIIN and J.P. Morgan in 2014 revealed that over half of impact investors are reporting market-rate returns.
Comparing Social Impact Investment vs. Traditional Investing
The core principal of impact investing is the motivation behind the investment. Impact investing almost runs counterintuitive to the financial system in that it uses non-financial metrics as a way of measuring the success or failure of a project.
By incorporating non-financial metrics, impact investing takes things into almost uncharted territory, requiring the creation of a whole new value table—one that does not fit snuggly into mathematical equations. When using metrics that cannot be converted into mathematical equations, the ability to measure value is impaired and often left to the subjective opinion of the investor.
How to Measure Social Impact
By incorporating non-financial metrics into the measurement of the success or failure of a project, an investor must now set non-financial goals that they hope to see achieved.
An example of this would be by measuring the “product impact.” A renewable energy company can measure the amount of energy it produces in kilowatts and compare this to energy consumed through non-renewable resources. The company could then continue this equation by measuring the amount of water disrupted or greenhouse gas emissions avoided by the increased use of renewable energy.
Another measurement that can be used to evaluate the success or failure of a project is the “operational impact,” which measures how many jobs are being created in an industry as well as the financial impact this has on the surrounding community.
Still another method an investor may use to measure the success or failure of a project is to set clear goals, with success being determined as reaching or exceeding the goal and failure occurring if such goals are not met.
Comparing Impact Investing vs. Traditional Philanthropy
Before modern-day impact investing became mainstream, social progress was largely funded through philanthropy.
Philanthropy can be defined as donating to a particular cause that is important to the donor, where no financial returns are expected.
While the idea of “giving” with no “getting” seems to have a higher moral fiber weaved into it, the actual benefits of this type of financial transfer are often only short-term.
If an investor wishes to support a project to increase reforestation in parts of the Amazon rainforest through philanthropic means, he/she has the option of donating to a charity or non-profit organization that plants trees in the area. Once that money is spent, however, the benefit stops.
If an investor wishes to support a project to increase reforestation through impact investment, that individual has the option of supporting companies, organizations, co-operatives, and non-profits that provide ecotourism in the area with a portion of the proceeds going toward reforestation efforts. The impact investment could be in the form of trade financing, allowing the company to borrow against projected future sales. The benefit from the initial investment then grows exponentially instead of drying up when the initial donation is spent.
Where Does Impact Investing Go From Here?
The question now is whether social investing can replace traditional philanthropic models.
The argument that socially-conscious investing has a more sustainable and lasting impact on social and environmental well-being than traditional philanthropy is appealing, but that does not mean it will completely replace the old model.
An example where traditional philanthropic methods are still preferable to impact investment would be in the form of aid. Aid after a natural disaster or political strife (such as war) is needed immediately. Such aid requires a traditional donation model, where the donor simply hands over the money with no expectations of financial return on investments and very little involvement in how the funds are used.
Image source: Bigstock
To what degree impact investing will replace traditional donations is still unclear, but it is quite certain that, moving forward, impact investing will play a larger role in society—to the benefit of all of us.
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