Impact Investing: 'Generate change by your investment'
|Date:||06 February 2019|
|Author:||dr. Lammertjan Dam|
“The advantage of Impact Investing is the specific combination of risky investing on a small scale and thereby making a positive contribution which is often very manifest.”
Impact Investing is the more activist side of socially responsible investing (SRI). Impact Investing focuses on positive contributions to society instead of only preventing the negative consequences of investments. It is distinguished by an active or venture capitalist approach. Financial returns are not the most important motive, whereas the change you can generate by your investment is.
The research results on SRI in practice are mixed. In general, the return on investment is lower. In finance, lower returns are associated with lower risks, but it could also mean that investors prefer SRI over non-SRI investments even when they return less. However, there are also forms of Impact Investing with more risk. Projects in venture capital or microcredit for example, are riskier and possibly have a higher return for that reason. On the other hand, taking an active approach by investing in multinationals is another type of Impact Investing which is less risky and this corresponds more to SRI.
Impact Investing is a comprehensive term. This also applies to its research area that is partly qualitative and partly quantitative. We try to determine when firms actually have a social or environmental impact. There are a lot of indicators, but it is difficult to tell if a company is sustainable or not. There are reasons for this. The first reason is that the societal views and preferences of the impact investor can be very subjective. For instance, one investor may vigorously oppose child labor, while another may actually promote it in the context of a socially responbile employer who does not exploit the child and provides him or her for instance with good health care and education.
A benefit of investing is the opportunity to influence the policies of particular companies or multinationals. If you want to contribute something to climate change for example, the investment side may be an appropriate channel to do so. In case that an investor does not buy shares of this multinational, the price decreases and the management feels the urge to change their environmental policy. In this way investors can actively or passively contribute to certain socially responsible developments.”
Lammertjan Dam obtained his PhD in Economics and Business at the University of Groningen (2008) and is currently an Associate Professor of Finance at the department of Economics, Econometrics, and Finance. He has a background in Econometrics (Ma, 2002, cum laude) and focuses both on economic theory and empirical research in the fields of corporate social responsibility and financial markets.