Last year was a time in which nothing was certain,
everything changed, and just about everyone wanted to “do better.” At the same
time, “social impact investing” started to land on the tips of investors’
tongues – sometimes awkwardly, as if it were meant for someone else to say
“Social impact investing is actually not a new concept,”
says Alex Castelli, managing partner of Emerging Markets at CohnReznick. “But
given the global events over the past couple of years, it has risen to
prominence. All indications are that it will continue to gain momentum as
individual to institutional investors will continue to embrace the missions of
the companies in which they consider making investments.”
So, what do people mean when they say ‘social impact’?
Social impact investing can mean a lot – that’s what makes
it tricky. At a baseline, investments around social impact usually regard a
company’s sustainability and its overall contribution to society.
When these investors say they want to see companies do more
social good, they mean they want to see business decisions being made that
align with sustaining the future – and the future of a business’s value. They
want to know that a company will be profitable tomorrow, which is why they’re
readapting to what they understand tomorrow might look like. We’re living in a
time in which social impact has widespread backing, perhaps unlike any other
time in history.
What does this actually look like? There are firms solely
dedicated to social impact investing. For example, Ethic, an investment
platform that recently raised $29 million in its Series B, helps their clients
build portfolios based on sustainability issues. The firm evaluates companies
on criteria ranging from non-discrimination policies to emission reduction
promises. It also divests when it determines necessary, such as its efforts to
pull the plug on companies that profit from private prisons.
A solid metric for this tidal wave of thinking is the
automobile industry: A slow mover (and huge culprit) in environmental concerns,
there’s now a financially incentivized rush to do better. President Biden’s
$174 billion pledge to support EV vehicles shows how deep the sustainable focus
Where is social impact investing heading in 2021?
Social impact investing is not a fad, and it is not a
one-and-done project. It will grow. The more socially conscious behavior
changes the expectations of consumers, the more integrated it will become in
“Impact investing does not equal not-for-profit or
philanthropic endeavors,” explains Asael Meir, partner and Technology industry
leader at CohnReznick – it can actually be very profitable. He points to Tesla
as an example; early investment in Tesla may have been considered an impact
investment, but now consumer demand for EV products is driving valuations.
How should an investor evaluate social impact
1. “Define social impact investing in the context of your
investment philosophy,” says Castelli. “Focus on those companies that fall
within your definition.”
This might require evaluating a company’s mission, analyzing
the diversity of the board and management systems, or evaluating the end
consumer. Taking a fine-tooth comb through the business with a newfound lens of
social impact might help you to find opportunities you never saw before. For
example, is the business reaching all of the audiences it can geographically
and socio-economically? Many businesses can stay true to the capabilities of
their products and services while expanding into new markets and thereby
helping more people: Do it mindfully, and that can be socially impactful.
2. When making a social impact investment, don’t be afraid
to enter new categories or take on smaller, bolder investments. For many social
impact investors, there’s a so-called “middle ground.” These are the types of
investments that are neither scrutinized to the same level as the firm’s traditional
investments nor written off as philanthropy. They are meant to serve as
building blocks for technologies and processes that someday could be both
sustainable and profitable.
3. Develop metrics for success. Nearly a century ago, a
shift in fiscal accountability led to the basic invention of accounting as we
know it. A similar shift is underway in regards to tracking your social impact.
When you are evaluating a company, look for how they define specific metrics of
their social impact success.
Every industry requires unique metrics – not every
sustainable impact can be measured in units of carbon dioxide. Companies with
unique propositions can find value in broadly shared metrics, such as the
Stakeholder Capitalism Metrics released by the International Business Council
(IBC) earlier this year.
How should investing firms think about their own social
Ultimately it’s a two-way street. It’s in the benefit of
both companies and investors to explore venues for social impact. Not only will
each party see the outlined benefits, but each side will be able to better
understand each other’s decisions down the line. Trust becomes established.
Often it’s the investor who is behind the curve – not the
company. Take diversification of leadership, for example. A study showed that
boards perform better when at least 30% of their members are women. Yet VCs
tend to be homogenous; recent data from Women in VC showed that only 4.9% of VC
partners in the U.S. are women. To build trust, it’s important for investors to
mirror the expectations they have of the companies in which they invest.
When it comes to “social impact investing,” it’s about
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