Can profitable investment be combined with a positive social impact?

Around the world, the term “impact investing” is being heard more and more often in discussions about investment. By this we mean an investment through which, in addition to financial returns, discernable positive social and/or environmental returns of some kind are sought. Such investments can be targeted at companies, funds, bonds and various types of project.

So, in the case of impact investing, the aim is some sort of social impact defined in advance by the investor (e.g. reducing youth unemployment, improving the quality of healthcare or curbing carbon dioxide emissions). In addition, the return on investment is often either directly or indirectly linked to the creation of some kind of social impact.

On the other hand, the much more familiar ‘responsible investing’ refers to the approach taken when selecting investment targets. It involves taking a responsible attitude, both in terms of the investment targets and the investor, towards ownership, the environment and social and economic issues. This does not necessarily include direct goals for achieving specific social impacts.    

International examples of impact investing include:

• In the UK, so-called social impact bonds have been introduced, to fund projects with the aim of preventing ex-convicts from re-offending.
• International Finance Corporation, a member of the World Bank Group, issues green bonds, which are used to finance projects in emerging markets, for reducing carbon dioxide emissions. As far as I’m aware, in these cases the return on investment is based on the financial success of the project in question, rather than the hoped-for impact; i.e. the actual reduction in emissions. On the other hand, in many cases a financially successful project is also effective in reducing emissions.
• The Nesta Impact Investments fund invests in firms whose products and services help to solve key social problems in the UK.
• DBL Investors is a Californian firm of venture capitalists: the funds they manage invest in companies located in low income areas and which engage in local recruitment, for example.

Key challenges related to impact investing include the difficulties involved in measuring the sought-after social impact and assessing the monetary value of the benefits. Because the gains are often diffuse, it can be difficult to identify who should pay for the social benefits achieved. In addition, wherever in the world impact investing has been carried out, public funding has often played a major role, either as a funding source or in partially underwriting the risks taken by private investors. This means that one of the challenges lies in finding a suitable model for collaboration between the public and private sectors, in order to give investments of this kind a risk-return ratio that will attract private investment.

Whatever the case, impact investing is an interesting theme. Throughout the autumn, Sitra aims to investigate whether this approach can be used to bring about positive social impacts of various kinds in Finland. In many Western countries, the public sector’s financial ability to perform its duties has been curbed in recent years. This means that new operating models are needed to enable the channelling of more private funding into boosting positive developments in society.