Co-founder and CEO of Halcyon, a nonprofit dedicated to providing space, community and access to emerging leaders in impact-driven business.
If we are truly going to “build back better” after more than 18 months of unprecedented disruption, we need to address not only economic recovery but also key social and sustainability issues. I believe impact investing — or investing in business ventures with social impact in their DNA — will be key to our success.
But as the co-founder and CEO of a nonprofit that supports impact-driven businesses, I’ve found there are five common myths about it that are important to dispel.
1. ‘Impact investing can’t deliver a return on your investment.’ Having a noble mission doesn’t have to mean sacrificing your bottom line. One of the key characteristics of impact-driven companies is that they are designed to both make a profit and make progress. Investors should be tracking the increasing demand for brands that reflect their values and realizing social impact ventures are capable of out-performing their conventional counterparts.
A 2019 survey of 600 U.S. adults by Markstein revealed that 46% of respondents “pay close attention” to a brand’s social responsibility efforts. Furthermore, Cambridge Associates published its first impact investing benchmark study in 2015 and found that returns of impact funds were comparable to those of conventional funds and, in some instances, outperformed them.
2. ‘There’s plenty of money in impact investing already.’ The impact investing industry has grown significantly since the term was coined in 2007, attracting an increasing number of investors of all types and from all over the world. Yet, it represents only a fraction of the market. Research by the Global Impact Investing Network shows that more than 1,700 impact investing organizations across the world collectively managed $715 billion in investments by the end of 2020. For comparison, research from the Thinking Ahead Institute puts the number of assets under management at the world’s 500 largest asset managers at $104.4 trillion.
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3. ‘Impact investors reflect the diversity of the founders they support.’ A year-long study by Confluence Philanthropy found that only a small percentage of investment funds are managed by or owned by women or people of color. The same disparity plagues the venture capital market. The result, as reported by Harvard Business Review, is that only 1% of VC-backed founders are Black, and less than 2% are Latinx. In my experience, impact-driven business ventures are more likely than the average startup to be founded by women and people of color. Fifty-nine percent of our incubated ventures have a woman founder and 69% have a founder of color. That being said, I believe the opportunity gap between founders and funding sources in impact business is still in need of attention.
4. ‘Impact investing is only for big banks.’ Large banks and investment firms certainly have a role to play when it comes to impact investing. By expanding their portfolios to include more socially conscious investments, they normalize this practice among traditional audiences. However, the sizes of these institutions dictate the scale a venture has to reach before it’s attractive for investment. This leaves out the early-stage ventures that need support from regional or focused investment groups to get them off the ground and on the radar of larger funds or ready for an initial public offering.
5. ‘Impact investing is just a trend.’ There is a reason the impact investing sector has grown in size in the past two years, and it’s because this generation’s consumers, entrepreneurs and investors are increasingly motivated by impact as well as profit. They are no longer seen as mutually exclusive, but inherently and inextricably linked. A survey by Morgan Stanely found that 95% of millennials have an interest in impact investing, and with them being the largest generation in the U.S. labor force, there is potential for exponential growth in this sector over the next decade. I believe the era of the “conscious consumer” is here to stay, and the era of the “conscious investor” is just beginning.
Tips For Getting Started With Impact Investing
Before yet another myth about impact investing emerges, let’s squelch the idea that impact investing is difficult or onerous for the investor. It doesn’t have to take more work to invest mindfully; you just need greater awareness. Investors have always been deliberate and willing to do their research, so this is familiar territory for those used to doing their due diligence.
For accredited investors, it’s a matter of finding deals that have impact at their core, and that can mean informing your network about what you’re looking for or simply asking the right questions: Does this company have a single, double or triple bottom line? In what way does this opportunity generate a positive impact in the world? Over time, your pipeline will fill with businesses that meet your impact criteria.
But you don’t have to be an accredited investor to be an impact investor. Large numbers of public funds now exist with impact angles or environmental, social and governance frameworks. Ask your investment advisor what’s available to you, and even just in asking, you’ll be a part of advancing the norm of conscious investing.