Three Things: What Is Impact Investing?

If you search for the
term impact investing, you will find a number of
very dry formal definitions, like impact investments
are investments make with the intention
to generate impact alongside a financial return. Such definitions
only muddy the water. Here are three things you need
to know about impact investing. First, impact investing is
not philanthropy or charity. In fact, impact
investing emerged as a result of failure
of philanthropists to address social problems. Despite an impressive
15% annual growth rate, philanthropists did
not make the world significantly better, safer,
less polluted, or healthier. This is because rich
donors are disconnected from the real
problems of the poor. They are also fickle and
frequently change their opinion about worthy causes. Impact investing aims to solve
this problem by allowing money to flow to local
entrepreneurs, who can solve local social
problems in a sustainable, for profit way. These entrepreneurs
are best positioned to understand local
problems such as inadequacy of local education, lack of
health care, poor food supply, and access to clean water. Second, not every socially
inclined investment is impact investing. A company that donates
one pair of shoes to impoverished areas of
Africa for every pair it sells in the US can abandon
their operations in Africa without any harm to
their core business. Investing in this
company might only be supporting shoe
production in the US. Similarly, buying stock in a
public solar energy company does not contribute to
additional green energy creation, since no additional
money flows into the company. Impact investing
targets companies that aim to create
additional impact as the core of their business. Third, expecting
financial return is important for many reasons. Impact investing is
investing, after in, and generating a return is
important to attract money. In addition, requiring
financial returns also sets a high bar for
businesses seeking funding. Investing in the business that
is not expected to make money is like donating to charity. Impact investors do not
want a solution for one year, like charities do. They want to invest in and
jumpstart a profitable business that will solve social problems
year after year after year. Only long term,
sustainable solutions can move us closer to our
goal of a better society.

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