Social Impact Investing

Earn, spend, save, invest–these are four financial activities that are part of everyone's life. Ideally, we aim to spend within our earnings and save the remaining. We invest all or most of our savings as per our financial plans. 

Investing helps us grow financially and maintain the worth of the money we save. We look at various investment options and assess their risk and reward to achieve these objectives. A high reward is desirable, as it leads to a higher return on your investments in a shorter time, but it requires you to take risks. Eventually, you end up investing as per your risk appetite. While risk and return are the two important financial considerations, ethical considerations are also influencing investment preferences.

What is Social Investing?

Socially responsible investing, social impact investing, or simply, social investing is a form of investment where one invests in companies and funds with socially responsible business practices. Examples of such businesses include renewable energy, clean technology, environmentally sustainable businesses, etc. As a social impact investor, you may avoid investment in betting companies, alcohol and tobacco companies, or any company with a poor social and environmental record.

Is it Financially Viable?

Like in any other investment, you would want your social impact investing to be profitable. However, social impact and profitability are not correlated. A tobacco company may be highly profitable, while a solar power company may struggle to remain profitable. So, while investing to make a social impact, you must look into the company's financial strengths, along with its social parameters. 

To ensure your preferred company has a positive social impact, you should research if it has adopted Environmental, Social and Governance (ESG) as a part of its management policy. ESG aims to promote sound management practices, stakeholder relationships and sustainable and social development efforts. 

However, these alone don't guarantee balance sheet success. Once a company ticks these boxes, you must also look at the commercial viability of their products and services, the public acceptance of the same, market share, sales and profitability. If all these factors provide a positive outlook, social impact investment can also be a financial success.

Why Invest For a Social Impact?

Apart from earning a handsome profit and return on investment, you will have other issues that are closer to your heart. You may have zero tolerance towards child labour, you may be against the exploitation of eco-sensitive geographies, you may be against the commercial use of products like ammunitions or addictive substances, and so on. Social impact investing helps you to invest while staying true to your social, moral and environmental values. 

Investing Towards a Better World –

 
You can place your money in funds and ventures that play a part in helping the world get rid of its problems through social investing. From climate change to poverty, from indigenous rights to ecology, from education to health, socially responsible companies can divert private funds to address global issues. CSR activities can be a shot in the arm for government initiatives that seek to resolve these issues. As an investor, you can take heart from the fact that your hard-earned rupee directly or indirectly addresses these issues. 

Add A New Dimension to Your Portfolio – 

Adding a social angle to your investments will add a new dimension to your portfolio. Social investing can be dependable too. Recently, a Morgan Stanley report stated that as many as 79% of investors have shown keenness for sustainable investing. 

Earn Good Returns Too – 

Socially responsible companies need not compromise on their profitability. In fact, addressing a challenge like alternative energy can open up new avenues for a business. Therefore, your social impact investment can yield high returns too. During the period 2004-2020, it was noted sustainable equity funds in the US performed better than traditional equity funds. Even in India, the better performing ESG mutual funds generated an SIP return of 40-55% in one year ending in mid-2021.

Deterrents to Social Investing

Despite the aforementioned high returns, concerns about investment returns remain a key concern among investors while considering social impact investments. Investors also face difficulty identifying the criteria that can validate the social impact of an investment. Besides, investors may also have concerns about the authenticity of a company's social impact claims. For instance, investors may fear that a company highlighting its afforestation drives here may be plundering rainforests elsewhere. Social and sustainable investing is an emerging subject, and investors may point out that they don't have enough reference points to understand the same. Even if they understand its significance, they may also struggle to find suitable investment products. 

The Way Ahead for a Social Investor

Socially conscious consumers prefer handmade and artisanal products while shunning away from plastic waste. Social investing is the next logical progression as a generation of socially conscious consumer base enters the investment world. Not surprisingly, millennials have shown a keen interest in sustainable investments. As more and more industries and businesses are looking to adopt UN's Sustainable Development Goals, social investing can be seen as the future of investing itself. Therefore, any investor today should look at social investing as a realistic investment option and earmark a portion of his or her portfolio in its favour. 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.