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Impact Investing: What is behind it?

What it is, how it performs and what it can do: specialist dr. Tillmann Lang becomes concrete and highlights the central aspects of impact investing.

Traditionally, philanthropy and asset accumulation are considered two opposing poles. But this traditional notion ignores the fact that companies are among the big catalysts for change, for better or for worse. And this is where impact investing comes into play.

Changing the world positively

CO2 emissions, equal opportunities, human rights, corruption – companies have a strong influence on these issues. Often they are in the middle of it. Unlike conventional “sustainable” investment (also known as SRI, socially responsible investment), impact investing not only avoids the biggest offenders. Instead, you can invest in impact investing in companies that change the world positively according to their own ideas. Thus, impact investing is between traditional investing and charitable donations. But let’s start from the beginning …

What is Impact Investing?

The definition of impact investing in the financial world can be very different. For example, author Judith Rodin writes in her book “The Power of Impact Investing”: “A new wave of investors is using impact investing to tackle some of the biggest challenges of our time – from climate change to water scarcity, from lack of access to health care to Education and affordable housing. The goal remains to make a financial profit as well. ”

The pioneer in impact investing, “The GIIN” (Global Impact Investing Network), defines the investment form somewhat differently: “Impact investments are investments with the aim of achieving not only a financial return but also a social and environmental impact”.

The bottom line is that it’s a way for investors to make the world a better place – and at the same time increase their wealth with an investment portfolio. It can and should be invested in companies that represent their own interests and values.

Beware of greenwashing

There are now various ways to do impact investing. FinTech platforms, startups, but also larger banks offer investments in sustainable bonds, equities, funds or loans. But how do you decide what is “sustainable”? This is not always easy – and so-called “greenwashing” is one of the main reasons for that.

Greenwashing is a serious problem, not just for cash. It takes place when companies with sophisticated PR and marketing campaigns engage in environmental labeling frauds to convince people that they are much more environmentally aware and act than they actually are. For example, a fashion label may celebrate its commitment to human rights while working with suppliers whose working conditions are anything but decent.

To exclude such cases, is for providers of impact investing challenge and claim at the same time. However, everyone sets their own standards – which may eventually lead to companies such as Alibaba, the Chinese e-commerce platform and one of the world’s largest gadgets and disposable fashion markets, landing in the sustainable portfolio. This is what happened at a major Swiss bank.

Especially inexperienced investors are therefore advised to put together their own portfolio of a trusted provider, where you have full insight and a say. And always: beware of horrendous fees!

Profits through Impact Investing: what can I expect?

It is a common misconception that you have to sacrifice financial returns if you opt for impact investing rather than traditional investing. Even though there are many impact investors who have the “impact” or impact on the financial gain, it is possible to be positive without having to compromise on the profits. Today there is more and more evidence that impact investing even leads to higher profits than conventional investments:

A Royal Bank of Canada survey of more than 40 major studies found that there is no evidence that socially responsible investing leads to lower investment returns.

GIIN’s 2017 Annual Impact Investor Survey found that the majority of respondents returned a market return and 91% of investors and fund managers generated a return that exceeded or even exceeded their expectations.

A Harvard University meta-analysis (a statistical analysis that combines the results of several studies) found that applying socially responsible criteria for evaluating funds has no negative impact on the risk-return ratio.

One explanation is that if a stock portfolio is driven by strong environmental and social practices, the financial risk is diminished by resource constraints, volatile oil prices, environmental penalties, corruption and human rights scandals. In addition, you invest in future-oriented topics and future technologies. For example, as low carbon technologies gain in importance in the future, they are often a good investment.

Can money really make a difference?

But can a small investor’s money really have an impact on a company worth billions? It certainly can. An impact investing trend is to merge to invest in a business to make significant changes. A number of activists have acquired a significant stake in arms maker Ruger in the fight for more weapons security. Their goal was to put pressure on the company.

Another example is Tesla

The company is only 14 years old. Nevertheless, it is a leader in the market for electric vehicles. Without investors who believed in the company, Tesla could not have become what it is today. It is also conceivable that other car manufacturers would not have felt the pressure to develop their offer without Tesla’s innovations.

Depending on the investment you buy direct shares in companies. Being a co-owner of the company gives you the right to attend the AGM and vote on important strategic decisions. As many investors do not exercise this right, you have a real chance to influence the direction of the company you invest in.

Say, Impact Investing brings together the best of two worlds: increasing your own wealth and the ability to have a real impact on the evolution of our planet. An effective combination that goes far beyond traditional investment options.

Also published on Medium.

Published inStartups

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