Is “impact Investment” Better Than “evil Investment”?
Money is a completely fictional, invented resource. In the modern age, we are literally creating money out of thin air, and more and more often it does not even require any physical presence. Huge fortunes are represented by ones and zeros on buzzing servers, and even currency values fluctuate and intertwine according to strange algorithms that few people understand.
Our relationship with money is also strange. Some of the least important people in our society are paid the most, while those who serve as the backbone of civilization are paid the least. No wonder most of us tend to think of money as the Force in Star Wars : the dark side is obviously more powerful. We all assume that Darth Vader will always win, although we would like to imagine that we are Obi-Wan Kenobi. We apply this cynicism to the concept of impact investing, or an investment strategy aimed at initiating concrete, beneficial social or environmental changes in society. The suggestion is that while impact investing may be commendable, it cannot make you as rich as, say, investing in Soylent Green, Inc.
But is it really so? It’s always easier to assume the worst, in part because assuming that things like impact investing are useless gives us an excuse to do nothing. If there is an intended punishment for trying to make the world a better place with our money, we have every reason not to be concerned. At the same time, proponents of this strategy often argue that impact investing is actually better than less ethical approaches. The truth is a little more complicated.
Impact investing provides more data
The first thing to understand is that impact investing is not a monolith. Impact investors have different strategies and goals. Some are completely focused on impact and are willing to accept lower returns if they get the change they want, but many impact investors are just as focused on profits as they are on anything else. In fact, many powerful investors have fiduciary responsibilities that require them to seek the best return on their investment strategies. This means finding a balance between stimulating change and capital growth. Impact investors can also seek different levels of friction: some focus on supporting companies and policies that are in line with their goals, while others pursue an “engagement” strategy , accumulating large stakes in companies they want to steer towards positive change.
In fact, impact investing is often viewed as an advantage for one simple reason: it increases the amount of data to take into account . Investing is an information game: the better you understand an industry and the more data you have about what’s going on in it, the better your chances of making smart decisions and generating huge returns. Whatever your goals as an investor, it’s always good to have more data.
This is very important because environmental, social and governance concepts (ESG) are becoming an increasingly important trend in the world . This means that knowing the impact of your ESG investments is vital to understanding what the return can be, regardless of your personal interest in becoming an activist investor.
Do not be evil
So impact investing is not charity, but it’s not magic either. While it is true that in the early days of the concept, impact investing tended to require trade-offs in terms of returns, since then the data has improved and strategies have improved, so this is no longer the case. The return on investment impact is largely in line with traditional approaches . In fact, some impact investing benchmarks show that impact investing strategies tend to outperform more traditional approaches, although not always and not by a huge margin.
But, like any investment, there is a risk involved. Impact investing does not provide any “ethical bonuses” that guarantee or inflate returns. Most powerful investors still prioritize the “impact” part of their investments, but more detailed data and smarter analysis have made it possible to try to make the world a better place without necessarily reducing your profits.
Of course, as a freelance writer, my impact investing tends to focus on tipping my local bartender well. So far, the results have been satisfactory.