Impact Investing: When Finance Can be a Force for Good

Finance has Become much Maligned

Finance and financial professionals are much maligned and criticized for putting profit before people and focusing on a solely profit-based approach. Indeed, ever since the Great Recession of 2008 and the Global Financial Crisis, finance has been much pilloried as many people believe that financial globalization and the pursuit of risky instruments such as derivatives due to greedy speculators have caused untold misery and suffering to the ordinary people. Thus, bankers, financial professionals, and speculators currently are the subject of much derision and fear.

What is Impact Investing?

It is not always the case that finance is solely for the benefit of the wealthy. The term or the trend known as Impact Investing wherein the profit motive of finance and the social causes or investment into social projects aligning profit with the common good can indeed open a new chapter in the history of finance.

Indeed, Impact Investing, as the term implies signifies the marriage of profit with the societal outcome and ensures that capital when allocated to social causes, can indeed be a force for goods. Thus, the emerging trend of Impact Investing is one where capital is funneled into societal cause thereby ensuring the good of the people.

Pure Capitalism was Always a Force for Good

However, it can be argued that finance in its purest form is anyway a force for good since profit-driven behavior often means that markets are made more efficient as well as social outcomes improved through the “hidden hand of markets” that allocate capital to the most productive outcomes.

This type of allocation means that only the most productive investments attract further funding thereby ensuring that only those projects that use capital and investments wisely are funded leading to efficiencies from economies of scale and synergies from effective deployment of capital.

Rise of Speculation and the Common Good

Having said that, a purely profit-driven approach does not always lead to better social outcomes since speculation, and the use of complex financial investments often lead to speculative behavior where the focus is on gambling with finance rather than investing in the “real economy”.

Indeed, this is what has been happening since the 1970s and which culminated in the Global Financial Crisis of 2008 wherein pure speculation without corresponding real economy investments lead to a casino type of capitalism.

It can also be said that pure speculation can lead to the difference between investing in a road or a project that delivers returns but at the same time, does not offer the same returns such as investing in the stock market and that too on so-called “penny stocks” where the investments are risky but yield huge returns when such bets succeed.

Investing for Social Impact

Thus, the fact is that the present capitalist paradigm must transition to a model wherein finance is allocated to the real economy as well as for impact investing where the poor benefit as much as the rich.

Indeed, books such as “The Fortune at the Bottom of the Pyramid” describe how targeting the very poor can often generate enough returns when such investments are made with careful selection and well thought out implementations.

Apart from this, impact investing is also about placing people and profit at the same level instead of one before the other or vice versa which can incentivize the financial professionals more towards investing in such projects.

The Case of Microfinance and the Example of the Grameen Bank

A clear benefit is possible in developing societies wherein projects such as Microfinance can lead to better social outcomes. Microfinance is the term used to describe the process of giving loans to the unbanked and the poor which are individually in small amounts but which when aggregated over Millions of such loans can lead to efficiencies from economies of scale.

A case in point is the initiative of the Grameen Bank in Bangladesh founded by the Nobel Laureate, Mohammed Yunus which proved that such Impact Investing improves the life of the poor as well as generates returns for the investors.

Impact Investing is Not Charity

Indeed, such initiatives have become more common across the world as the need to take into account collective good has become paramount over the years. Further, we need to caution you here that Impact Investing is not Philanthropy or Charity or for that matter, Corporate Social Responsibility where donations and contributions are made by the wealthy to the poor.

On the contrary, Impact Investing is all about aligning the Cold Logic of Capital with the Warm Feeling of Collective Good wherein profit making is accompanied by improving the lives of the poor as well.

Alchemy of Finance can be Used to Help the Poor

Apart from that, Impact Investing is also about channeling the Alchemy of Finance to the social causes thereby creating a situation where profit is not a dirty word, and the poor are not untouchable for the capitalists. In other words, Impact Investing is as much about society as it is about the greed of investors.

Through Impact Investing, we can revert to a much more balanced capitalism wherein risk and return are better correlated instead of the runaway type of behavior we have seen in recent years.

Conclusion

Lastly, Impact Investing if carried out after Due Diligence can lead to Capitalism working for all instead of exacerbating inequalities and inequities as well as be used to transition the world into a more sustainable place.

To conclude, with humanity facing multiple challenges that can lead to the end of the world as we know it, capitalism must again dedicate itself to being a force for good instead of a drive towards destruction.