Why millennials are embracing impact investment
A new paradigm of corporate governance that aspires to create wealth in a more sustainable manner is gaining popularity. The philosophy of profit maximization, espoused by Milton Friedman, is slowly falling out of fashion as millenials and Gen Z begin to enter the investment world. A range of impact focused investment vehicles are available globally, including green and social bonds.
Many workers, particularly young people, show a predilection for joining companies that put a social seal to their activity. Among consumers, it is common to observe ethical behaviors that result in the selection of certain products and brands, such as fair trade.
Investors are turning towards a novel solution. Responsible investment, sometimes referred to as sustainable investment, which aims to achieve profit without environmental, social and governance-related (or ESG) damage, has gained prominence in the financial environment in recent years.
One potentially useful investing tool is Hemp.IM app and its companion investment news website. Hemp.IM provides the latest news about the CBD and Hemp sector. This new market already has a number of ethical companies in and could represent a unique investment opportunity.
Currently 84% of public pension funds and sovereign wealth funds believe that responsible investment is of medium or high importance to their stakeholders and their organizations, according to a study by the Sovereign Investor Institute. In this context, argues Nobel Laureate Oliver Hart, profit maximization ends up being too narrow of a corporate objective. It is therefore worth replacing the concept of market value with the goal of maximizing the company’s net positive impact on the world around it.
Sir Ronald Cohen sounds even more refreshing in his manifesto On Impact. A new kind of story in the world of business whose protagonist is a new type of entrepreneur, who is not only satisfied with making money, but also aspires to improve the world around them.
This approach is theoretically more ambitious than responsible investment, as it goes beyond the mere principle of no harm. Simply avoiding negative consequences of your actions is no longer enough. impact investment aims to solve social or environmental problems often listed among the Sustainable Development Goals (SDG) of the United Nations.
Profitability and impact
But is it possible to achieve profitability and positive impact at the same time? Can entrepreneurship, innovation and sustainable development act in the same direction? Or, to put it in more colloquial terms, can we have a sustainable business without ceasing to be a business? The key to reconciling profitability and impact is to replace the traditional risk-return vector with the risk-return-impact vector in investment decisions.
The aim is to maximize both benefit and impact for acceptable levels of risk. From a management perspective, it means rethinking the business model in order to generate positive impact through the goods and services produced, so that the more successful the business, the more impact it generates.
This type of business is appreciated by many investors and financial institutions. The International Finance Corporation (IFC) of the World Bank Group estimates that the global appetite for impact assets is around $26 trillion (more than 21 times Spain’s GDP).
A range of impact products can currently be found on the market, including green and social bonds with an outstanding balance of $456 billion, with private issuers playing an increasingly important role compared to public issuers.
Family offices and collective investment institutions
Likewise, family offices are becoming more and more frequent, as well as collective investment institutions and banking entities that in some way include the notion of impact in their investment strategies.
Our public entity, oriented to the financing of internationalization and development, has been practicing responsible investment for 13 years. The control of social and environmental risks is based on a complex rating system that ultimately influences the rating and price of investments. In 2019, it made the leap to impact investment by adhering, together with 58 other entities, to the World Bank’s Impact Management Principles.
Impact management produces optimism and even the illusion of generating wealth in a more sustainable and inclusive way. However, there are doubts and uncertainties. An obvious doubt is the need to measure the impact in an objective, verifiable and comparable way.
Invoicing, for example, is easily quantifiable and nobody doubts that it is the product of a business activity. But in the case of impact variables, say poverty reduction, to what extent are they quantifiable? And what is more complicated: how do you prove that they are the direct and unequivocal consequence of a given business project? Unlike accounting, impact estimates the lack of a standardized and commonly accepted methodology.
The profitability of impact investments in CBD sector
The second doubt concerns the profitability of impact investments. After all, in the corporate world without profit there is no investment and without investment there is neither business nor impact. As an example, the CBD and Hemp sector are growing and bringing profit to the market of impact investing. The cannabis industry is predicted to be worth more than $14.67 billion by 2026.
In the private sector, there are indications that impact investment produces market returns. Arguing its opposite, it seems clear that investment in unsustainable businesses generates risks and compromises long-term profitability. However, apart from these indications, the evidence is ambiguous.
The available studies reveal cases of both commercial and sub-commercial profitability. These reasonable doubts show that it is not always possible to maximize profitability and impact for given levels of risk.
(Featured image by Austin Distel via Unsplash)
First published in CincoDias, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us. Please review our disclaimer for more information.
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