The Rise of Impact Investing and its Relevance to the 21st Century

Impact investing is all about making profits and doing good for society. You might well ask if businesses and corporations also do this as they create value for their consumers and enrich their lives by creating experiences for them. The difference is that whereas corporations often ignore the social and environmental costs of their business operations, impact investment led firms exist to make profits and do good for the society as well.

When compared to CSR or Corporate Social Responsibility, impact investment is not outside of the business model but is incorporated into the core of the model.

In other words, impact investing is all about ensuring that firms utilized the opportunities presented by climate change and reaching out to the marginalized and make profits at the same time. Therefore, unlike CSR, firms need not view it as a burden but instead, use the challenges of the world’s problems and convert them into opportunities.

Further, impact investing has emerged as a noticeable trend in recent times as the awareness among the world community about the need to tackle social and environmental problems and at the same time incentivize businesses for this purpose means that impact investment is increasingly being seen as the way forward.

Finally, impact investing is also much about social entrepreneurship and the crucial difference is that impact entrepreneurs often present business models that appeal to venture capitalists mainly because they are profitable and scalable whereas social entrepreneurs are often constrained by their limited profit making business models and the lack of scale in their business plans.

Introduction: Profit and Social Impact Can Go Together

It is often said that businesses exist to make profit and to quote the legendary Chicago School Economist, the Late Milton Friedman, “the business of business is to make profits”.

This approach has meant that most businesses and corporations often proceed under the assumption that social and environmental concerns are secondary to their primary objective of existence, which is to make profits.

With the increasing awareness among consumers about the social and environmental costs of business, the pressure from activists on corporations to rein in their rampant and rapacious profit at any cost motto, and the growing concerns of governments around the world to combat climate change and other “externalities” of corporations, CSR or Corporate Social Responsibility emerged as the paradigm shifting model for businesses.

However, this report is not about CSR per se but rather the burgeoning trend among entrepreneurs and corporations to combine their profit motive with that of social and environmental responsibility.

In other words, there is a feeling among entrepreneurs worldwide that they can invest as well as make an impact on society without compromising on either. This is the phenomenon of the emergence of the so-called impact investing which derives its core concepts and has the core competency theme of harnessing the power of markets to do social good.

Whereas it has often been the case CSR was viewed as an irritant by many corporations as they had to set aside separate budgets for it as well as make adjustments to their core business models, impact investing on the other hand is all about having the business model aligned to social and environmental impact without compromising on the profit imperative. The rise of impact investing has been catalyzed in part due to the urgency with which climate change has to be combated and in part due to the ticking time bomb of depletion of fossil fuel deposits and the awareness that for the sake of future generations as well as to avoid catastrophe, the world needs to transition to alternative energy as quickly as possible.

Opportunities and Challenges in Impact Investing

As can be seen from the introduction, impact investing has become the buzzword for venture capitalists and billionaire investors like George Soros and Warren Buffett as well as Bill Gates among others because these investors are at a stage in life where their vision for the world and the legacy to make a meaningful impact on society stirs them to encourage impact investing.

Though we are not saying that only these investors along with some VCs in the United States are funding social entrepreneurs, the fact remains that on an average, the US is leading the pack as far as funding for social entrepreneurs and impact investors is concerned.

Further, impact investing and social entrepreneurship are often used synonymously though the former incorporates the profit motive more than the latter. The reason for the astounding rise in impact investing is because at last we have found the right balance between market let profit oriented capitalism and the need to make an impact on society that is socially and environmentally responsible.

The bottom line for any successful impact investment is that the business model of the firms has to be aligned to social and environmental concerns apart from the need to make profits, which mean that impact invested firms, meld, and merge profitability with societal good.

Therefore, there are many opportunities for impact investing in fields as diverse as providing banking for the unbanked, increasing the rate of penetration of mobile telephony, investing in solar and wind power generating companies, and creating climate wealth or using the looming climate crisis challenge and transforming it into an opportunity to make profits as well as make a positive impact on the world.

Having said that, it must be noted that there are challenges galore for impact investors and these are to do with the fact that most impact investors focus on technological innovation or using technology to solve the problems of the world. Further, there are those who often invest with a shorter-term perspective whereas impact investing is typically a longer-term commitment.

Apart from that, the media coverage of social entrepreneurship and impact investing focuses on the ideas that have made it whereas there are many whose ideas were good or brilliant but yet, they did not receive the necessary traction to fructify them and convert them to successes. Apart from this, the fact that most impact investing is driven from the US (as noted earlier) means that many entrepreneurs in the developing nations often fail to connect with the VCs for funding and support.

Examples of Entrepreneurs Who are Making a Difference with Impact Investing

We have discussed what impact investing means and the opportunities and challenges that characterize this trend. If we were to discuss examples of how some prominent firms that utilized impact investments to succeed, the firms such as Sun Edison, Grameen Phone, Grameen Bank, MPesa, Liberty United etc spring to mind. These firms are in as diverse and varied fields as banking, renewable energy, mobile telephony, and mobile payments. This means that social impact need not be confined to energy or climate change but can encompass other fields as well.

The point here is that for a business to be socially and environmentally impactful, any field can be chosen as the world at the moment faces myriad challenges from a host of issues all of which require urgent attention.

Moreover, impact investing has started to go mainstream wherein putting markets to work for profit and global good at the same time means that smaller firms and entrepreneurs with ideas and attitude can find receptive investors. The bottom line of the firms listed above is that all of them connected the profit motive with that of social good, which meant that their business models were at the core a merging of profit with social good.

Conclusion: The Long Road Ahead Yet Hope Looms on the Horizon

Before concluding this report, it needs to be mentioned that these are early days yet to be carried away by the rise of impact investing. The reason for this is that there comes a point in the lives of all firms where profit and social good cannot coexist together especially if these firms have to scale up and leave the small is beautiful business model.

Moreover, the fact that the world needs billions if not trillions in dollars to deal with the pressing challenges it faces, impact investing is still a billion dollar field. Despite this cautionary note, it needs to be mentioned that someone has to make a start and the firms listed in this report had the courage and the temerity to venture into something that would let them earn profits and at the same time do good as well.

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