CSR

07/10/2020

Financial returns and a positive social impact: is it possible to have both?

Impact investing lies somewhere between philanthropy and the pursuit of mere profits and is gaining in popularity

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Impact Investing

Impact investing has been a normal part of business life for some years now, and not just among large multinationals. While there is no globally agreed-upon definition, what we can say is that it refers to the specific intention to make investments to support projects, companies or investment funds that generate a beneficial social impact.
So why has impact investing generated so much interest? The possibility of a win-win situation combining a positive social impact with financial returns, be it by helping to protect the environment, support disadvantaged social groups, safeguard a country’s historical and artistic heritage, promote greater inclusion in the workplace and so on. The fields in which impact investing can make a difference are practically endless.

Essential / sustainable public spending

Impact investing can take many forms and be embodied in numerous business models and normally fills the often considerable gap between essential and sustainable public spending. Essential public spending is that necessary to meet all society's needs, from pensions to unemployment benefits, social housing to household benefits, art history to cultural and historical heritage, justice to healthcare, etc..

Impact investing fills the gap between essential and sustainable public spending, in wide-ranging social, environmental and cultural fields

A vast spectrum of primary needs that governments cannot fully meet on their own: however they slice the pie, there is not enough to go around. It doesn’t even come close: the gap between the essential public spending and that which is sustainable (that the governments can ideally spend) is several tens of billions of euro a year for Italy alone. And these figures do not improve beyond its borders.

The role of business

The private sector has stepped in to partly fill this gap between essential and sustainable public spending via its investments: impact investing is usually made in the healthcare, disability, household and social exclusion fields although companies also earmark funds for culture and artistic and historical heritages.

The investment choices are guided by those principles dear to a company’s heart of effectiveness and efficiency as well as rigorous ESG criteria. Their aim is to strike the right balance between the key driver - the social goal - and the financial return and risk level.

Leaving aside a company's inclination towards investing in one field rather than another, the decision about how and where to invest is based on the usual considerations: the efficiency and effectiveness of investments underpin any decision. Impact investing supports this process and assists companies in redirecting and reorganising their expenditure and in developing new investment models.

From donations to investments

The concept of making a charitable donation (which may be tax deductible) is outdated, although still possible and certainly to be encouraged. Conversely, impact investments are a financial transaction to all effects with the aim of recouping the initial investment and potentially making a profit when a company strikes the right balance between the social impact (which is the investment's real objective) and the financial return and risk level.

ESG criteria

Like for every successful financial transaction, impact investing is not just based on a company's intuition or inclination; rather, the decision should be based on rigorous ESG (Environmental, Social and Governance) criteria.
It goes without saying that an investment of this type should be based on a socially responsible approach, avoiding investments that could damage the environment, health, the community, etc. Even though the financial return is a factor in the equation, it is neither the only one nor the most important and a company's decision should be guided by an investment's social or environmental impact.

A virtuous cycle

Why is the transition from the albeit worthy philanthropic approach to impact investing so important? Because it is more sustainable as companies can earmark greater financial resources to impact investing than to donations. In addition, as the investment's objectives also include making a profit, all or part of this profit can be reinvested to increase or make new impact investments.