The past two decades have witnessed a massive growth in conscious consumerism, reflecting its weight in the impact-investing market.
According to the Global Impact Investing Network (GIIN), the size of the impact-investing market is estimated to be US$715 billion as of 2019. As the impact investing ecosystem matures, many first-time investors are looking at portfolios in this sphere. Here are a few considerations for the first-time impact investor.
Understanding the distinction between ESG and impact investing
As the demand for sustainable investing peaks, funds are now taking a more holistic view of investments by taking environmental, social and governance (ESG) factors into consideration. ESG funds are guided by these factors but not necessarily driven by impact.
Impact investing, on the other hand, involves specifically investing in solutions– solving global challenges while keeping in mind the risks and returns. If you are a first- time impact investor, you may want to understand the difference between the two and make your investment decision.
Your impact investment portfolio is akin to any other investment portfolio
Many investors believe that they may have to take higher risks in impact investments as compared to traditional investments. Alternatively, some believe that they may need to settle for a lower return. This is inaccurate.
Just like any investment, most impact investors should take into account their portfolio, what kind of returns they are seeking and the risk they are willing to take that fits this return. A good investment will pay off irrespective of the medium.
Consider your liquidity needs
It’s key for first-time investors to assess their liquidity needs and financial plans before they invest.
Investments are a long-game and their liquidity needs should determine the asset class and the type of investments they ultimately choose to go for. Construct your portfolio so that some of your money can be made available immediately if needed, and balance that with longer-term investments.
Also Read: ADB Ventures debuts with 2 impact investments, raises US$60M for its equity fund
Align on the objectives and measure the impact
A commitment to impact investment shows the investors’ appetite to impact change while gaining market returns. First-time investors should assess their social and environmental objectives to the goals of their potential investments. Whether it’s climate change or gender equality, choose issues that you personally feel passionately about.
Your motivations complement other key factors driving your investment decisions. Similarly, measuring impact complements your ROI – determining the success of your investments. While measuring impact may be difficult, there are systems created by organisations like GIIN and TONIIC that help companies quantify the impact.
Measurements like Social Return on Investment (SROI) and Impact Multiple of Money (IMM) are often used. Additionally, there are certifications available that will assist companies to authenticate impact data as well as some global measurements to standardise across industries.
Always measure impact while considering the results, scale and financial returns expected.
Keep sight of political risks
Before making your investments, you should be aware of the geographical and political ecosystem of countries where your investments are activated. Changes in government regulations or economic policies directly impact your investments and it’s important to keep sight of such trends.
Impact can be created across geographies, across sectors
Many investors from first world countries shy away from impact investing with the assumption that impact investing can only be done in developing countries and they might not want to invest in a different currency.
However, there is always an option to choose another impact focus. Instead of looking at challenges in developing countries, you could invest in impact technologies with social and environmental impact in your own country, for example.
Technology-driven startups in the impact space are a good place to start for first-time impact investors. Medical devices are an example of one such industry. Some medical device technologies that have high potential can impact lives while being highly profitable.
Where to go from here
If you’re interested to begin your journey in impact investing, first begin by identifying a subject about which you are passionate – and then start exploring opportunities in that area. Remember to keep in mind the fundamentals of investing generally and look for a risk-return balance that meets your financial needs.
Also Read: What is impact investing?
Finally, keep in mind currency, geopolitical and other risks as you explore investing globally. And remember to have fun! Doing good while doing well is extremely rewarding, and I wish you all the best on your journey.
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