All investing is impact investing

March 7, 2019

Recently my husband and I attended the annual global Toniic impact investor gathering at the SlowFood headquarters in Pollenzo, Italy.

Impact investing is a growing field at the intersection of investing and philanthropy that aligns personal values and financial return while maximizing positive impact. You can read more about the event and the intersection of slow food and sustainability here.

It was a stimulating four days that offered an opportunity to compare impact investing goals and strategies with some of the most forward-thinking leaders in this space.  

The excellent presentations and discussions helped us reaffirm our mission at Red Rocks Impact to invest in solutions that contribute to a sustainable and prosperous future by reversing carbonization, reducing resource waste, empowering communities, preserving habitats and protecting biodiversity.

After a week spent immersed in impact investing topics, I came away with lots of new ideas, a stronger sense of purpose, and one big question: Why isn’t all investing impact investing?

The reality is that all investing is impactful, but the negative impact and costs are hidden and externalized to the commons.

So, a better question might be: Why aren’t all investments and business ventures measured in terms of both financial return and impact?

To answer this question, it’s only fair to point out that measuring impact is less straightforward than measuring financial return.  

It’s also important to recognize that while the benefits of purely financial investment are highly concentrated, the costs are distributed and therefore easier to ignore by investors and policy makers.

Nonetheless, the investment mindset that have shaped current economic policies and capital markets are based on several false assumptions that literally put the future of humanity at risk.

False assumption #1: ‘Profit first’

There was a time when traditional banks and venture capitalists provided capital to purpose-driven explorers, settlers, and entrepreneurs. Capital had an important enabling function that created shared prosperity. However, somewhere along the line – in part due to political lobbying to consolidate personal wealth - the quest for quick profit ended up outweighing other factors such as social and environmental costs.  

Because these hidden costs weren’t reflected in consumer prices - enabling companies, banks and shareholders to realize an artificially high return - communities and habitats paid a price.  Although in the short-term this benefits companies and investors, everyone pays the price.

It’s encouraging that forward-thinking banks such as Triodos Bank and impact-first investment firms such as Better Ventures deploy capital for sustainable impact. This growing movement of mindful and purpose-driven investors are proving that values and profit go hand in hand.

False assumption #2: ‘It’s not my problem’

We all know (or know of) successful individuals who don’t think it’s their responsibility to help create prosperity or security for others.  However, most successful people had help along the way, from family, teachers, mentors and advisors.  

Even those rare individuals who had no help whatsoever benefited from public infrastructure such as education, security, access to opportunity, roads, waste management, communication networks, energy grids, and health care, without which their success would have been impossible.

So, the ‘self-made’ success is a myth, but the idea has helped perpetuate the ‘pure profit’ mindset, as well as the systematic lobbying aimed at avoiding the redistribution of wealth via taxes.

False assumption #3: ‘I make up for it with philanthropy’

Philanthropy plays - and will continue to play - an important role in supporting environmental and social causes.  However, investors who aren’t paying attention can easily end up negating the positive impact of their donations, for example donating to Greenpeace while investing in big oil.  

When philanthropy is motivated by ‘karma control’ and lacks clear accountability to achieve a certain goal, the impact may be diluted or even unintentionally harmful.  

A more productive mindset: ‘Purposeful profit’

Investing purely for profit while ignoring hidden costs is short sighted because the hidden costs can be quite serious.  Whereas investing purely for compassion may feel good but without a clear connection between inputs and outcomes no lasting solution is likely to occur - plus you’ll probably lose your money.  Impact investing seeks to find the right balance between purpose and profit.

Aligning profit and outcomes

Measuring impact alongside financial return doesn’t mean profits don’t matter and impact investing isn’t philanthropy. Ultimately, impact investing aims to accelerate innovative solutions to problems like climate change while creating a more transparent capital market, making it easier for investors to align their values and financial goals.

Here’s the good news: Solving mankind’s most pressing problems is bound to be a good investment. In fact, you could even say we’re betting on it.

Laura Schroeder

Making money do more....