What is Impact Investing? How is it Different from Sustainable Investing? Who Cares?

This semester and across my time thus far at Columbia, I have been focused on taking courses under the sustainable finance and development header and within its broader ecosystem.  I first became interested in this subject while living in Copenhagen Denmark during my junior year of undergrad. It was clear from the moment I arrived in Scandinavia that this was a region and a group of people who were far more conscientious and aware of their carbon footprint than we were in America and New York. Even upon approach to CPH, arrays of offshore wind turbines in the North Sea are visible from outside the plane window.  My only experience interacting with wind turbines prior to that point had either been looking at videos of them online or playing with my old boss’s office paperweight replica. From above, it is hard to grasp the sheer physical magnitude of these structures, but it is still an intense dystopian sensation getting a 3,000-foot view of a Scandinavian wind farm.  With that said, I later had a chance to see them while paddling in a canoe up close and personal and I was completely blown away.  Did you know that just one full rotation of an offshore wind turbine blade can power a typical northern european home for over 20 hours? Me either! This was my initial introduction to “sustainability” and for a good while, I was convinced that I wanted to work at Ørsted or Equinor working on wind developments thinking that they were the most sustainable form of energy. Unfortunately, interest rates and the broader macroeconomy did not agree and deemed offshore wind projects particularly in the U.S. financially unsustainable. 

My understanding and definition of what sustainable investing means is something that is constantly evolving. To me, sustainability in an organization is about so much more than simply using low energy LED light bulbs or installing electric vehicle charging stations in its company headquarters (although these are certainly useful practices). It is about implementing a comprehensive strategy across every layer and quadrant of a business to promote long term prosperity. This is because sustainability is important across financial, economic, and social factors. Emphasizing only one aspect, such as say environmental, is incomplete and does not give a holistic understanding of developing, investing, or operating sustainably.

In order to implement a sustainable strategy successfully, it is important to have a forward-thinking planner at the helm of the organization. The heads of companies need to prioritize sustainable and meritocratic hiring strategies such as eliminating racism and sexism and only hiring the most qualified people for the role. They also need to be cognizant of identifying and eliminating wasteful and inefficient processes within their business arms. This will inevitably lead to cutting costs and reducing capital expenditures for the business which in term makes shareholders happy. Lastly, they need to be continuously searching for ways to be stricter about who they use as suppliers. By actively choosing to do business exclusively with suppliers who strive for sustainability within their own organizations, a company can promote better values across the industry and be a pioneer for change. There is much research that states a continual focus on driving and reverberating sustainable values across the entire scope of operations for a firm generates long term employee morale, revenue growth, and productivity. 

In my opinion these sustainable investment principles should be incorporated into every investment strategy. You would be hard pressed to find an investor or individual who is raising capital for an idea or venture who would outwardly suggest that their project or company in unsustainable especially if it is financially unsustainable. In investment decks perhaps the most significant slide in the whole deck is the expected MOIC and IRR page. The only exception to this would be within the impact investing space. This space has rapidly evolved and matured, however in the early days of impact investing, bankrollers would promote and prioritize social and environmental impact rather than financial sustainability and returns. This primarily comes in the form of grant money. Impact capital also comes in the form of non-grant resources that could pay for the research, design, and implementation of a new impact fund or blended finance transaction. These types of resources encompass a variety of innovative financing mechanisms. Concessional capital, often provided by development finance institutions or philanthropic organizations, can be instrumental in covering initial costs and attracting additional investment by accepting below-market returns or higher risks. Technical assistance facilities, frequently incorporated alongside the main investment vehicle, can fund crucial activities such as developing impact measurement frameworks and providing capacity building for potential investors.

Catalytic first-loss capital, provided by impact-first investors or Development Finance Institutions (DFI), can help launch new funds by taking the highest risk position in the capital stack, thereby encouraging other investors to participate.  Impact-linked financial instruments, such as impact bonds or sustainability-linked loans, can attract investors interested in fund design by tying returns to impact performance. Lastly, ecosystem development funding from larger impact investors or foundations can support new fund designs as part of building the broader impact investing infrastructure.

I am starting to understand some of the financial structures and the types of institutions involved in blended finance and impact transactions. My greatest challenge with impact investing is that I have yet to find any evaluation metric or criteria that can sufficiently quantify the impact of a dollar invested in each project. Who is to say that one project is more impactful than another? Who is to say that one group of people is more deserving of philanthropic project finance than another? Is this just a modern form of colonialism in a nice dress and pink lipstick? Spreading western ideals to subjugated classes of people who need a westerner to tell them how to live and how to generate economic productivity? Do we even want third world (if I'm even allowed to use that term anymore) countries to develop given that as a nation’s GDP rises, so too does their emissions per capita and therefore their net climate impact. Are there arguments and think tanks where people who govern developed nations are actively working to counteract the work of impact funds and DFIs helping to keep the wealthy nations continuing to hoard the wealth and resources while everyone else lives in poverty? If not, then why do places like Nigeria and Venezuela, who have some of the most hydrocarbons and natural resources of any region on the planet still have most of their population living in extreme poverty and under government corruption? American Plutocrats wouldn't know anything about that right?

By and large, I am supportive of impact investments and think they do more good than harm.  But I still have many skepticisms and questions behind the motivations, investment firms, and people who are promoting these investments. 

“When it seems too good to be true, it usually is.” Melody Carson