The relationship between business and social impact has been changing rapidly over the last few years. In the past, civic organizations were the primary standard-bearers for driving change and social good in the world. Recent developments, however, have infused business into social efforts, with amazing results.
By creating social enterprises, innovative business leaders and entrepreneurs have been able to increase the degree of their impact while adding economic value to the markets they serve. At the center of this change are well-intentioned investors, entrepreneurs and industry experts working together to make sustainable impact-driven businesses that consumers can be proud to get behind.
In fact, 30 percent of employees say they are more efficient when working for companies that have some sort of social cause built-in. In the digital era where brand affinity is a source of competitive advantage, social enterprises are more likely to gain customer share, edging out less socially conscious competitors.
There is, however, a great deal of complexity involved in impact-driven businesses, social enterprises, and environmental initiatives, so it is critical for anyone considering entry into the space to be informed and have all of the right tools at their disposal. The following are some of the top things that anyone considering impact investments, partnerships, or business opportunities should know about.
The Alignment of Financial and Impact Goals
One of the biggest pitfalls for impact investors is a failure to align objectives in such a way that impact is structured into the deal adequately. Since impact investing is a relatively new space, it requires additional information and experience beyond what most investors traditionally know. Chintan Panchal is an impact investing expert, and founder of RPCK, a law firm that advises impact investors and companies. He explains, “Many opportunities out there may be great financial investments, but the financial return doesn’t tie in with the social return, while others are the inverse. Once you recognize how these objectives play together, you can work to find alignment to make a worthwhile investment.” The key is to make sure that all parties involved have a genuine interest in both the social good and financial success of any deal.
It’s also critical to make sure that impact fuels the business. Panchal continues, “Are the economic and social goals in lockstep and therefore built into the business model? Or is impact the engine that drives the business, as it is in the case of clean energy production? The more critical that a company’s impact is to its own financial success, the more clear it is that impact is in a company’s DNA.” If the impact is closely linked with business performance, then it’s more likely that the company will deliver on both fronts.
Beware Greenwashing
Because consumers are looking for socially and environmentally conscious brands, there are a number of companies that attempt to “greenwash” their brand. Greenwashing is essentially an attempt to make a brand appear socially conscious without doing anything to really contribute to social or environmental good. Sustainability expert Jason Ballard argues, “It’s misdirection, and it’s intended to shift the customer’s focus from a company’s appalling behaviors to something that’s peripheral.” As people become more discerning, they are watching out for red flags that indicate greenwashing.
One of the best ways to spot when a company is using impact to market itself without actually being committed to the cause is by following influencers and communities that report on these topics. A report by Scientific American recommends, “Look beyond advertising claims, read ingredient lists or ask employees about the real skinny on their company’s environmental commitment.”
How to Scrutinize Social Funds and ETF’s
Not all funds are built the same. Any savvy investor knows that investing in a fund or ETF requires due diligence and research to ensure maximum financial output. The same goes when considering the success of impact-driven and socially conscious funds. The emergence of impact funds and social, environmental, governance (SEG) rated ETF’s can cause some investors to rely too heavily on the fund manager to determine the degree of impact.
Just like you would evaluate an investment’s financial potential, you should dig into every fund or ETF to ensure that the various ventures involved meet your personal impact goals. In doing so, you can have a better understanding that your money is achieving the change you are aiming for.
Impact investing is a rewarding space and that more and more investors are looking to transfer their assets to impact-driven opportunities. Consumers are making a similar shift, with Nielsen research indicating that 66 percent are more likely to do business with a socially conscious brand. The key is staying informed, and taking the right partners to help guide you through the more complicated aspects of forming deals and evaluating organizations.
As Panchal put it, “It’s more challenging, complex and requires a more sophisticated approach – but can be incredibly rewarding, financially and personally.” When innovators investors and entrepreneurs come together to structure effective impact ventures, they can collectively make the world a better place while improving the performance of respective markets.