Written by: Kok Yu Xiang, 2 October 2020

*Opinions expressed in this article are strictly my own and do not represent that of any entity or organization. Please drop me a note at yuxiangkoksg@gmail.com if you spot any errors or inconsistencies.

A quick google search on impact investing will give you the definition of "investing into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". In other words, impact investing is providing commercial capital to address social and/or environmental issues, also otherwise commonly associated with responsible or ESG investing.

While sounding similar, the crucial difference is that impact investing is something deeper than responsible or ESG investing. For responsible investing, what typically happens is applying a negative screen and avoid making investments into companies with activities like weapons, tobacco, alcohol, gambling or animal cruelty. Impact investing goes beyond this negative screen and looks for companies with the intention to generate social or environmental returns. This often entails working with some of the poorest and most underserved communities in the world, looking to answer the question of “what will happen to these communities if this company or organization is not there”.

That being said, I believe the aim of any business should never be focused solely on creating social or environmental impact. Such a business is likely not financially sustainable in the long run and no different from an NGO or charity. Rather, impact investing looks at companies that are accountable and seek to balance the financial, social and environmental implications of the business, all these three implications of equal importance and none less significant than the other. The simplest way to do this is to consider everyone in the value chain as primary stakeholders, meaning not just the direct shareholders and investors, but also the employees, suppliers, consumers and environment. This means taking a broader approach and examining how the business creates value for all the stakeholders involved.

Companies that have a deep understanding of the value chain and look beyond the immediate bottom line will be in a better position to achieve long-term sustainable growth. A case in point will be microfinance institutes (MFI), where charging a high interest rate increases the profitability of the MFI in the short-term, but not in the long run when customers are eventually unable to afford the repayments and start defaulting. This is already happening in countries like Cambodia, with many farmers and low-income communities in huge debts due to predatory lending practices from MFIs. It can be argued that a better approach will be considering the borrowers as part of the primary stakeholders, taking time to understand the borrower’s use of these micro-loans before putting in place a reasonable interest rate that allows borrowers to grow their income/wealth over time. These borrowers will be able to afford the interest payments and build a credit history, even returning to the MFI for additional loans in future. This also dispels the common misconception that seeking social returns comes at the expense of financial returns, since giving up short-term gains will ultimately secure the long-term sustainability of profits.

At the end of the day, defining and valuing social or environment returns will be different for every individual. On a personal note, what impact investing means to me is finding that delicate balance of achieving both financial and social returns, while also being able to discover and work with businesses in developing markets that are improving lives of the underserved. It excites me to be part of this journey alongside people that are doing good and more importantly, to be part of this journey in discovering my own impact.