The difference between social and impact investing
Social investing is one of many terms identifying an investment approach based on integrating values with valuation metrics when considering portfolio candidates. Other terms describing an emphasis on socially responsible investments (SRI) include socially-conscious investing and responsible investing. Impact investing is a newer branch of SRI extending into the realm of supporting organizations that provide beneficial social impact.
Do No Harm
Socially conscious investors focus on businesses adhering to a mandate to do no harm. The former motto from the Google code of conduct, “Don’t Be Evil,” was replaced in 2015, when Alphabet) took over as Google’s new holding company. The new code of conduct directs Alphabet employees to “…do the right thing – follow the law, act honorably, and treat each other with respect.” This new mandate more precisely articulates the values of socially conscious investors.
SRI advocates generally seek to avoid investing in companies with a history of resisting compliance with environmental protection regulations. Firearms manufacturers, gambling enterprises and tobacco companies are shunned by socially conscious investors. Impact investing focuses on companies committed to directing a portion of their resources toward improving circumstances for environmental sustainability, social welfare and small business opportunities.
Proponents of responsible investing emphasize environmental, social and governance criteria (ESG) as the standards to be used when identifying SRI prospects. Environmental criteria include such matters as a company’s natural resource conservation practices and its anti-pollution agenda. Social criteria can concern a variety of matters, ranging from Occupational Health and Safety Administration (OSHA) compliance issues to the reputations of businesses with which the company conducts its normal operations. Governance criteria concern such matters as whether a company uses generally accepted accounting principles (GAAP) in the preparation of financial statements, and whether the company extends suspect generosity to politicians and regulators.
Institutional investors are taking steps to ensure that their fiduciary responsibilities should include ESG considerations in their decision-making processes. In assessing the credit risks of a particular company, responsible investing goes beyond the usual financial metrics to include ESG metrics. Companies following practices that could result in legal or regulatory compliance sanctions face financial consequences, potentially creating difficulties in servicing debt. Filtering portfolio candidates with ESG metrics helps avoid such ill-fated investments.
Steve Lydenberg of Domini Social Investments is a corporate social responsibility advocate who suggests that stock exchanges should demand that listed companies provide full disclosure on multiple ESG metrics as a prerequisite to their listing. Lydenberg proposes that such ESG reports should be comprehensive and written in jargon-free language that is easy for retail investors to understand.
Raising the Bar
SRI advocates have intensified their efforts by expanding the goal of corporate social responsibility beyond avoiding harm. The drive for companies to take positive steps for the benefit of society as a whole has created a branch of SRI known as impact investing since 2007. One example of corporate efforts to improve social welfare is the Not For Sale campaign launched by Juniper Networks Inc. to end human slavery trafficking.
Social venture capitalism takes impact investing a step further by focusing on startup enterprises. This effort provides a boost for such early-stage businesses as those providing sustainable, production-level jobs in low-income areas, as well as hospitals in developing nations where medical treatment is unavailable.
More than 15 social venture capital funds have been in operation since 2010, providing investors with the opportunity to direct capital toward philanthropic and non-profit organizations. The Acumen Fund was incorporated in 2001 with seed capital from Cisco Systems Inc., the Rockefeller Foundation and three individual philanthropists. Acumen raises funds to provide long-term debt or equity investments in early-stage companies that provide affordable access to agricultural equipment, quality education, housing, clean energy, health care services and safe drinking water for customers in low-income areas.
More than four social stock exchanges are under development around the world, providing investors with the opportunities to buy shares in social enterprises. In the United States, Mission Markets does not function as a stock exchange, though it provides an online platform for investors to research and extend capital to investments that can deliver positive social and environmental impact.
In Canada, the Social Venture Connexion (SVX) is an online portal connecting accredited investors with social enterprises. The Social Venture Connexion is working toward becoming a true stock exchange, open to the general public. SVX is registered with the Ontario Securities Commission.