Impact Investing Takes on Added Importance In The Face Of A Diverse Number of Challenges.
If you need proof of how big a role responsible investing plays in today’s financial world, look no further than the $500 million partnership that was struck last month between Temasek, a Singapore-based investment firm, and London-based LeapFrog Investments.
LeapFrog specializes in so-called “impact investing,” a relatively new strategy that aims to meet specific social or environmental goals while delivering positive financial returns. The company’s partnership with Temasek represents the biggest single financial commitment to an investment manager that focuses solely on impact investing.
The deal came amid a recent flurry of impact investing initiatives, driven by growing emergence of issues ranging from the coronavirus pandemic to the changing climate. Impact investing is similar to ESG (Environmental, Social, and Corporate Governance) and socially responsible investing (SRI), though with a bigger emphasis on the positive impact money can have on workers, consumers, the environment, and society as a whole.
In the case of LeapFrog, the goal is to improve the lives of people in Africa and Asia through a company mission of “profit with purpose.” According to its website, LeapFrog companies provide about 212 million people with essential services such as healthcare and financial tools. More than 168 million of those people belong to lower-income communities in emerging markets.
LeapFrog is among a growing number of firms with an eye on impact investing. A recent article in the Financial Times, which cited data from the Global Impact Investing Network (GIIN), noted that impact investment assets reached an estimated $715 billion at the end of 2019.
Will Lofland, director and head of intermediary distribution at GuideStone Funds, describes impact investing as a way for individuals to become “more purposeful” with their money. In a column he wrote for Kiplinger last month, Lofland said the goal isn’t only about earning a return, but about “thoughtfully choosing one’s initiatives to generate both a financial return and a positive impact on society.”
On its website, the GIIN lists these key characteristics of impact investing:
- Intentionality: An individual investor’s or fund’s intended social or environmental impact.
- Return expectations: The expected profit and/or return of capital of an investment.
- Range of return expectations and asset classes: Financial return targets might range from below market to risk-adjusted market rate, while asset classes typically include cash and cash equivalents, fixed income, venture capital, and private equity.
- Impact measurement: Provides a gauge of the social and environmental impact of underlying investments.
These characteristics are similar to those outlined by ESG and SRI investors, but there are differences. ESG often uses socially and environmentally responsible investments to reduce risk over time, which leads to better financial returns. SRI is mainly concerned with picking investments that align with certain ethical values, whether they have to do with religion, politics, or social justice.
Emmett Maguire III, managing director of Search and Selection at wealth management firm Boston Private, noted in a separate Kiplinger column that impact investing provides a more direct connection between social/environmental values and investor capital. In some cases, it tries to quantify positive impacts, whether through a specific number of new schools or a specified reduction in carbon emissions.
“Impact investors are often able to deploy funds in service of causes that are not directly addressed by the public financial markets, such as community development and poverty alleviation,” Maguire wrote.