One of the new buzzwords these days is “impact investing”.
There have been numerous articles written on impact investing and how many investors, institutions and funds are adopting it. But what exactly is impact investing and who does it benefit?
Investopedia defines impact investing as follows:-
“Impact investing is investing that aims to generate specific beneficial social or environmental effects in addition to financial gain.”
Impact investing is thus socially-responsible investing, done with the aim of either helping a group or groups of people while realising a decent financial gain for investors. As the disparity in wealth grows larger across the developed world, more people are clamouring for the rich to invest in social causes in order to distribute wealth more equitably. This philanthropic movement is an initiative which has recently gained more momentum and widespread attention, with large banks hopping onto the bandwagon and encouraging high net worth individuals to participate.
Impacting the World
Impact investing is usually structured as deals, and many of these agreements may involve private equity where the investors pump money into a project or company which is then used to help an underprivileged group.
To give an example, impact investing may involve investing in a project to provide electricity to businesses in Africa, a region that may lack the resources to build a power station. Another example is an investment to improve water irrigation to help farmers who may not have the required funds or know-how to do so.
It is important that such initiatives have an end-goal in mind, which is either to build something (e.g. a plant, granary, school, warehouse or factory) or to assist in some aspects of peoples’ lives (e.g. educating the poor, providing electricity, helping out underprivileged families to start a simple business).
On the flip side, impact investing also promises above-average returns for investors, simply because such investments tend to be illiquid and your capital may be locked up for months or years. Returns from impact investing can be double-digit, and this arrangement can be a win-win situation whereby the benefits accrue to the recipients, while the investors also receive a good return on their investment.
Although this type of investing is not yet made available to the general public, there may be plans to eventually make it available to retail investors. As it stands, the initiatives are a work in progress. More is being done to convince people to realize the dual benefits of helping others and at the same time, generate a decent return on their investment.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.