What is impact investing?
With impact investing, you invest money in companies or projects that aim to have a positive impact on society or the environment in addition to making money. If it is not only important to you that you earn money with your investment, but also that your money makes the world a little bit better, impact investing could be interesting for you. For example, you could invest in a company that produces renewable energy and thus helps to reduce CO2 emissions.
What should you consider before investing?
Be clear about the goals you want to pursue with your investments and the types of companies or projects you want to support. There are many different areas in which you can become active as an impact investor, such as renewable energy, sustainable agriculture, social justice or education. You alone decide what is closest to your heart.
As always, take enough time to carefully consider the companies or projects you want to invest in. If you feel unsure, it's best to talk to an independent financial advisor. We at ellexx also offer such advice: You can book such consultations with investment advisors Bente Roth and Rachel Alioska.
What are the risks of impact investing?
With impact investing, your money often flows into projects or companies in the Global South, where there tends to be a higher risk of social and political instability. Unrest, conflict and regime change can have an impact on your investments and jeopardize them. Companies may also face unexpected financial challenges, such as production problems, legal disputes or regulatory changes (such as adjustments to tax legislation or compliance requirements or political developments such as Brexit).
This would mean that the company would incur losses - and your investment would lose value. It is therefore worth keeping an eye on the political situation in the countries in which your selected companies operate - and not just from a financial perspective, of course.
Impact investments tend to have lower liquidity because they often invest in companies, projects or funds that are not listed on public stock exchanges and are therefore more difficult to sell. As a result, they represent a higher risk: If you need your money back quickly, it may be difficult to sell your investments quickly and at a fair price.
And last but not least: whether your investment will really achieve the sustainable effect you want is not guaranteed per se. So you need patience for this type of investment. It is not yet easy to determine when a project will achieve a clear impact. This is partly because the relevant laws and labels are often still lacking. Incidentally, this problem also exists in sustainable investing with regard to so-called «greenwashing»; you can read more about this in our sustainability series.
Which products can be used for impact investing?
As with all other types of investing, the same applies here: Funds are investment portfolios. Your money is invested in several different companies or projects; in impact investing, these have a social, societal or ecological benefit. The advantage of such funds is that your risk is spread more widely.
As an investor, however, you unfortunately have no direct influence on the composition of the funds. This, on the other hand, is the advantage of investing specifically in individual companies or projects: you have more control and can choose who you want to invest in. However, you also bear a higher risk with this direct impact investing because your capital only flows to a single location.
Which is the better choice for you therefore depends on how risk-averse you can or want to be, how much capital you have available (you can of course also invest in funds and companies at the same time) and what the long-term goal of your investment strategy is.
Are women more interested in impact investing?
The Zurich-based impact investing company Inyova conducted a study in 2019 to find out what women investors pay attention to: 66% of participants said that they think about the sustainability impact of their investments, while 34% said that sustainability is particularly important when investing.
In a UBS study in 2022, for example, 79% of women stated that sustainability plays an important role in their investment decisions. Other studies also suggest that women are more likely to found companies that are suitable for impact investing.
Globally, there are also some studies that show that women are more interested in impact investing: In a survey conducted by RBC Wealth Management, women were twice as likely as men to respond that sustainable criteria are important to them when investing.
What impact does impact investing really have?
There are various examples that show that impact investing can trigger change. The Kenya-based company M-Kopa, for example, sells solar energy products to households in rural areas of Africa. Since its foundation in 2011, the company has supplied over one million households with solar energy.
Another example is MicroEnsure: founded in 2002 and headquartered in London, the company offers affordable insurance for people in developing countries. The offer is tailored specifically to individual needs: In particular, risks such as natural disasters or illnesses are covered by the insurance policies.
MicroEnsure has already covered over 50 million people and works closely with local NGOs and microfinance institutions in countries such as Ghana, Bangladesh and Colombia. The company was named «Best Micro-Insurance Provider-UK» in the 2022 Global Excellence Awards by financial magazine Acquisition International. The company was recognized for its leadership in the field of micro-insurance and for its contribution to promoting financial inclusion in developing countries.
But impact investing can also make a difference within companies: a study by Harvard Business School examined how impact investing affects various factors. The study analyzed over 2000 companies in 23 countries over a period of five years.
The results show that companies that invest in social and environmental causes generally have happier employees, stronger customer loyalty (7.5 percent more), a better reputation (4.1 percent more) and higher financial performance (4.8 percent more) than companies that focus solely on financial gains. The results also show that, on average, these companies are financially more successful in the long term than other companies that only focus on financial profits.
Impact investing is also an important factor in terms of sustainable investing and ESG criteria: by investing in companies that are committed to these criteria, you can ultimately also contribute to a gender-equitable future. Start-ups by women still only receive a fraction of the funding that is made available to ideas by men.
Impact investing could therefore help to reduce this imbalance by encouraging investors to invest in companies that pursue social and environmental causes and are financially successful at the same time. As a result, female founders who focus on this area may be able to access capital more easily and thus build and scale their businesses more successfully.
Samantha Taylor
ellexx
