Impact Investing
- UConn Financial Educators Council
- Feb 17, 2021
- 2 min read
Updated: Feb 27, 2021
By: Sam Lombino
Impact investing has been around as a concept for centuries. However, it has gained popularity since the term was officially coined at a 2007 conference in Bellagio, Italy. The framework for Impact Investing is called ‘Environmental, Social and Corporate Governance Investing’ or E.S.G. For an investment to qualify as E.S.G. it must contribute to a cause that improves the environment or society in some capacity.
From the environmental side, firms can invest in an E.S.G. friendly manner by decreasing the 13% of the world still lacking electricity. Investors can financially support electricity distribution companies that would extend grids and increase the prevalence of renewable energy sources. The introduction of electricity in these communities would allow the storage of medicines in refrigerators, nurses to attend to patients after sun set, children to get a better education and businesses to increase productivity. As communities start to flourish, the electric companies unlock a larger addressable market of paying customers. On top of that, excess energy gets sold on the green energy market. The returns on these investments can be used to solve a new problem.
Social Governance investing can be divided into two parts. One is the ‘Corporate Governance’ aspect of E.S.G. This could mean only investing in companies that have a certain threshold of diversity on the Board of Directors. The other branch is ‘Social Governance.’ An example of this second branch is investing in opportunity zones. An investment in an opportunity zone is what NBA Hall of Famer Earvin “Magic” Johnson has spent 33 years doing. Founded in 1987, the Magic Johnson Enterprise has directly invested in infrastructure for the advancement of the community, provided micro-financing for minority-owned businesses and created strategic partnerships with prominent brands such as the LA Dodgers that better the lives of ethnically diverse and urban communities. One of these partnerships is with Starbucks where they re-branded marketing campaigns to appeal to an urban customer, provided 2,100 local jobs which paid an estimated $29.8M in salaries/wages, individualized the music and interior design of each store that reflects the host neighborhood and used a grassroots approach to foster key relationships with local government officials, community leaders, and nonprofit organizations.
Investing has always been associated with a stigma of greed. Impact Investing makes it so that capital gets tied to initiatives and projects that combat the world’s challenges while still generating significant returns. Just like anything, this is not a perfect solution and aid needs to come from many sources but it is encouraging that there is a growing appetite from our generation.
Sources:
Exchanges at Goldman Sachs: Markets Update: How E.S.G. is Changing
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