Investing with Impact
09 August, 2024
Material created with the support of EVPA
Investing with Impact is an investment strategy that aims to combine financial returns with positive social or environmental outcomes. This approach means that organizations adhering to this strategy invest in projects or companies that contribute to solving socially significant problems (e.g., healthcare, education, renewable energy, sustainable development, etc.). While striving to achieve positive socio-environmental indicators, these investors primarily focus on financial profit. Unlike the «investing for impact» approach, where impact is the main goal, in the «investing with impact» strategy, the impact is considered an additional objective, realized on the condition of profitability.
Sustainable Development as a Method for Selecting Reliable Partners
For entrepreneurs following the «investing with impact» strategy, social change, although not the primary goal, can become a tool for reducing financial risks. For instance, focusing on social impact, sustainability, and responsibility can help organizations select companies more likely to avoid sanctions for unethical behavior. This can improve financial outcomes, as social impact becomes an additional but important criterion when choosing investment targets.
Furthermore, when selecting potential investment targets, social organizations often use standardized criteria such as ESG (Environmental, Social, Governance), PRI (Principles for Responsible Investment), and others. Negative screening can also be applied—a strategy where investors avoid purchasing shares or other investments in companies due to their negative social or environmental activities (e.g., tobacco manufacturing companies). Such standardized approaches significantly facilitate measuring the sustainable impact of investment targets, ensuring quick reporting, which is crucial for initiators of respective social projects.
Managing Financial Risks
Entrepreneurs choosing the «investing with impact» strategy do not always develop a methodology for assessing and mitigating social risks. They adhere to the «do no harm» strategy to avoid investing in enterprises that might have a negative social effect. These organizations primarily focus on achieving profit, so an important aspect of their activities is minimizing financial risks, which includes:
- Conducting detailed financial analysis, assessing profitability, and potential risks before making investments. This helps understand whether the project or company meets financial performance requirements.
- Integrating environmental, social, and governance criteria, which allows identifying potential threats related to the social or environmental aspects of the investment target in advance.
- Diversifying investments across different projects or assets to reduce overall risk. For example, pension funds often consider various asset classes and geographic regions to balance risks and potential returns.
- Continuous screening of financial and ESG indicators. This strategy allows for quick responses to changes in the internal environment of companies or external market conditions, which is essential for timely risk identification and mitigation.
Directions for Implementing the Impact Investing Strategy
Investing money in projects that aim to achieve financial gains and positive social or environmental effects has several main directions, including investments in:
- Renewable energy, which helps reduce greenhouse gas emissions and improve environmental sustainability.
- Healthcare, such as biotechnology, new treatment methods, or medical technologies that can enhance public health.
- Education or learning development initiatives, to improve access to quality education and increase literacy levels.
- Infrastructure projects, such as providing access to clean water or enhancing the energy efficiency of cities, which can positively affect people's quality of life and the environment.
Investing with impact is a strategy that combines financial profit with a positive impact on society and the environment. By using this approach, investors achieve financial results by investing in projects or companies that address social or environmental issues, making it an additional goal alongside ensuring profit.