Impact Investments: Three factors to consider when evaluating your next impact investment
How can Asian investors ensure they are allocating their wealth towards companies that are actually creating a positive change? Here are three important factors that can help.
Impact investments are made to companies or organizations that not only generate a financial return, but also conduct their business in a way that creates positive social or environmental effects.
Impact investing challenges the classic notion that social and environmental issues should only be solved through philanthropic donations, and that market investments should only aim to secure financial returns. With impact investing, you can help make the world better while enjoying economic benefits at the same time – which is why it is becoming increasingly mainstream, including in Asia.
When high net worth individuals (HNWIs) were asked in a global study whether they planned to increase their allocation of funds to impact investment in the coming years, 58.2% of respondents in Asia Pacific (excluding Japan) answered yes, which was higher than respondents in Europe (43%), as well as the international average of 49.3%[1].
The desire to impact invest in Asia is not surprising, since while the region is arguably the new center for global economic growth, this prosperity has not adequately addressed (or has even made worse) many underlying social and economic problems.
These problems include gender inequality, climate change, health challenges, corruption, natural resources depletion etc. Hence there is an appetite among Asian investors for economic growth to start going hand in hand with improved social and economic conditions.
The question is, how can Asian investors ensure they are allocating their wealth towards companies that are actually creating a positive change? Here are three important factors to consider when evaluating your next impact investment.
1. Look for the data
Many companies in recent times claim to have Corporate Social Responsibility (CSR) schemes, for causes which you may care deeply about, such as promoting green energy, gender parity, clean water and affordable housing. You may therefore wish to consider investing in such companies.
However, always check to see if there is reliable data available which confirms that they have in fact made significant progress in these areas. This data may be available on company websites or in annual reports.
At the end of the day, you do not want to invest in an enterprise that claims to be making positive change, but has not actually made much progress on the ground to back up its claims.
2. Weigh positive vs. negative impact
Let us say you have found a company that is promoting a cause which means a lot to you and has reliable data to back it up. Before you invest, check to see if the positive impact the company is making is not negated by any undesirable practices.
These include having a large carbon footprint, unfair treatment of employees, or any practice which you find morally objectionable (distributing tobacco and firearms, etc.) Impact investment therefore is not only about finding companies that have positive influence, but also screening them for potential negative influence.
3. Work with an investment manager
Arguably the most important factor is to work with an experienced investment manager to help you make your next impact investment. Your investment manager will be able to advise you on which companies have had the most success in making positive change, in a manner that fits your profile as an impact investor.
Broadly speaking, there are two types: The first are financial first investors, who want to maximize financial returns, while also achieving some degree of social or environmental impact. The second are impact first investors, who want to maximize social and environmental impact, while also acquiring some financial return.
Based on your profile, the investment manager will recommend companies that match what you are looking for. Your investment manager will also inform you of the degree of financial risk that you may be exposing yourself to in allocating your wealth towards a particular organization, since like any other types of investments, this also carries some risks.
Working with an experienced and trustworthy partner is one of the most effective ways of making sure your investment really does make the impact you want, in a way which is consistent with your characteristics as an investor.
[1] Global HNW Insights Survey 2016, Capgemini.