What Social Investment Is About, Really?

2020 was a big year for ESG investing. When back in March 2020 all markets had a free fall, this was the one sector that remained untouched. So lets talk about what exactly is impact investment, a sector that many of us heard for the first time in 2020. Why is it significant and why we have to consider it in our everyday lives.

I've been wanting to learn about social impact investment for some time and I thought that the best way to wrap my head around it is simply to talk and write about it in my own words. So lets get in to it...

What is Social Impact Investment?

Broadly speaking, many sources are describing it as an investment in businesses that generate impact as well as profit. Right...too broad, I know. Maybe, we can start with what social impact is not. Social Impact is not a charity or philanthropy donation.

In fact, professor Elena Loutskina from University of Verginia says that it is the failure of philanthropists and charity organizations to address social issues that gave rise to impact investing.

The main reason for such failures is the lack of understanding of the needs of local communities by philanthropists and organizations. This is why local entrepreneurs would be a better target for impact investors. They know and understand the needs and problems of their neighbors, families and friends (such as lack of healthcare, housing or education) in much more depth than someone based across the ocean, for example.

Another feature of impact investment that Loutskina pointed out is that generating impact should be the core of the strategy of a business in order to amount social impact business, not just profit. For example, I used to think that companies which donate one pair of shoes for charity for each pair they sell amounts to social impact business. This appear not to be true as the core business can exist without that charitable side of it.

Last but not least, impact investment does require financial returns. I will talk about the different types of impact investing and financial returns in another article, but here it is important to note that not expecting/ receiving financial return when making an investment in a company simply amounts to a charitable donation. This is not what impact investing is about. Similarly to traditional investors, impact investors are seeking a long term profitable business that will tackle social problems in the long run, not year by year.

We, the millennials love the concept of social impact investment. 67% of millennials take social, political and environmental values in making investment decisions and this number keeps growing. So I will be chatting a lot about social impact, fellas...

Bee kind,

M