Often times, investors don't appear to care about the environment. It seems they only care about the almighty dollar. Traditionally, the main priority of investors has only been financial return, meaning social and environmental impacts have played second fiddle, if at all.
Entrepreneurs in the environmental and sustainability sectors know all too well that securing funding for green endeavors is difficult, but vital, for industry success. The emergence of impact investing, which generates “a measurable, beneficial social or environmental impact alongside a financial return,” could finally change the tides.
Impact investing seeks to create a double or triple bottom line where financial returns are either placed below or on equal footing as social and environmental impact. While profit is still a goal, for a growing amount of investors it is no longer the sole concern. Assets like ethical values, sustainability and social consciousness are considered as key screening criteria, especially for investors seeking to supercharge positive change in the world.
Impact investing alone is not enough to make launching and scaling a green business easy, but it is certainly paving the way for more environmentally conscious financial decisions.
Impact investment: How it works.
Where government and philanthropy were once viewed as the primary drivers of social and environmental ventures, the private sector has recently been staking its own claim. Environmental and social change can’t be accomplished at scale without help from the private sector. Impact investing is meant to be a win-win, without which market forces may or not be agents for good.
In the 90s, academic gospel was that green investments could not perform well, full stop. Once the clean investment sector grew to scale, opportunities sprouted up and this gospel was disproven. Now we have two related but distinct areas -- impact investments and traditional investments with clean and green characteristics, where investors are primarily or fully investing for economic returns.
Ensuring “double bottom line” or “triple bottom line” goals are the foundation of impact investments. Concessionary investors are willing to lose some financial return for the sake of social or environmental good, and are thus considered “pure” impact investors. Non-concessionary investors seek a conventional fiscal bottom line, and a second bottom line for social or environmental impact, or a triple bottom line for profit, planet and people.
The following chart illustrates the spectrum from philanthropy to pure investment, with impact investment occurring in the overlap.
Tesla and Warby Parker are two of many examples that show that success and positive change do not have to be mutually exclusive. (Tesla is a for-profit company with an environmental impact at its core. Warby Parker is a B corporation dedicated to economic return and social good.)
Impact investing is an exciting development. There are currently $60 billion in impact investments under management, and industry pundits target growing this to $2 trillion, or one percent of assets under management, by 2025. This has tremendous potential, but it is still just a small part of the overall investment market.
As a business owner and entrepreneur, it's best to ensure that your company model is robust enough to make money before social or environmental impact considerations. Otherwise, the company is likely to be limited in scope and scale.
Some skeptics still see the merging of finance and philanthropy as bad economics, while others, like myself, believe it has merit that can be adapted to the mainstream investment world. Fundamentally, I believe that pure impact investing is an important area, but limited. There simply are not enough investors willing to forego market returns for impact. It's the icing on the cake rather than the cake itself.
Entrepreneurs are better off focusing on the market return sustainable investors and non-concessionary investors looking for a double or triple bottom line. These groups take economic analysis into account first, opening a path for the large majority of the $210 trillion in investable assets worldwide to have a strong, positive influence on the world.
Ideally, all investment funds will incorporate environmental or social lenses. If two investment options are equal economically, the one that has a positive double or triple bottom line is preferred. Market return investors along the borders of the traditional and impact worlds prefer that such lenses are available, and try to foster them if they are not. So if you have a good business that has a positive impact as well, you will have a much wider audience than purely relying on social or environmental good.
To attract investors, social entrepreneurs can opt to set up a B corporation or gain visibility by getting their business rated on a database called GIIRS, short for Global Impact Investment Rating System. The system evaluates and compares the impact factors of various companies, which helps inform investors’ decisions.
But entrepreneurs with more to offer than impact aren’t limited to B corporations or GIIRS. Market return-focused impact investors -- closer to the mainstream investment world -- seek financial opportunity first, then try to achieve a double or triple bottom line whenever possible.
This fundamentally links back to the business case and market potential. If you do not have a business model that works in the non-impact sector, it will be challenging to scale purely because of impact investments. If you have a model that works well in the non-impact sector but has even stronger advantages due to impact investment, you have the best of both worlds.
Market return-focused impact investors present a greater opportunity for entrepreneurs if they want to ensure scalability, allowing financial returns to inform the impact.
Environmental impact has already begun to influence success, as consumers increasingly want products and services that are low carbon or zero carbon and align with planet-friendly values. At the same time, sustainable practices can save money by reducing waste and conserving energy, allowing companies to generate higher returns.
The union of investment and impact is almost certainly more than just a trend. As millennials take over the workforce -- inheriting billions along with evolved views of business responsibility -- environmentally conscious investment will flourish.
Budding green businesses today have a unique opportunity to tap into mainstream markets by creating economic returns and joining them with environmental returns when possible. When this happens, their environmental and financial value will resonate for a brighter and more sustainable tomorrow. Now that’s a return I think we can all get on board with.