Social Business Makes Way for Impact Investment

Sazzad Hossain
April 29, 2014

A million dollar question
In the first part of this social business blog series, we have learnt what a social business is and how it can be used as a catalyst to remove disparity in wealth distribution throughout the world. After publishing, some of the readers asked me one common question: if social business is that much beneficial to the society, then why is it not gaining the momentum it should have, particularly in a developing country like ours?
Well, the answer is quite simple. Every investor wants return on his invested capital. People of Bangladesh are no different. Though social businesses can be used as a weapon against poverty and other financial crisis, it does not offer any financial return except for the recovery of the capital. As a result, most of the investors are reluctant to invest in a business that may work for the betterment of the society but in return, provides nothing to them.

Impact Investment – social businesses re-explored
To solve this conundrum comes the theory of Impact Investment.
This seems up till now a perfect combination of traditional and social business models as Impact Investments are investments made into companies, organizations and funds with the intention to generate measurable social and environmental impact alongside a financial return.
Impact Investment is quite similar to socially responsible investing, but differs in a fundamental way: Socially responsible investors often screen out companies that they believe may cause social or environmental harm, while impact investors look to invest in businesses that produce social or environmental benefit along with the ROI.
Impact: a confusion
Some people argue that all businesses are meant to make a positive impact on the society as a whole as they create employment opportunities and eventually help economy flourish. So why give particular focus on this Impact Investment thing?
Yes, this is true to some extent that the end result of investment brings good to the society as a whole. However, while investing, not all businessmen intentionally employs capital to make positive social or environmental impact which differentiates impact investing from traditional investing.
Impact Investment – the new buzzword
The field of impact investing is attracting growing numbers of organizations and increasing amounts of money. Some estimates show there are nearly 200 registered impact investment funds, and many foundations (such as Rockefeller), networks (like GIIN and ANDE), and mainstream financial institutions (including JPMorgan Chase) are active in the field.
However, there still remains one major challenge – the lack of consistent reporting about the social and environmental performance of impact investments. Without standard performance measures, investors are not able to accurately assess the non-financial value of investment opportunities and therefore hesitate to invest.
So a set of metrics was needed so that companies can report on these investments in a consistent way and thus an investor can make an informed decision. IRIS was developed to address this need by providing a common language for reporting the social and environmental performance of impact investments. IRIS is the catalog of generally-accepted performance metrics that leading impact investors use to measure social, environmental, and financial success, evaluate deals, and grow the credibility of the impact investing industry.
Impact Investment – is it going to be just another boulevard of broken dreams?
Although the growth in the number of impact investors epitomizes a crucial achievement, it is important for people to understand that if they continue dreaming without keeping the reality in mind, then they will end up nowhere but in a boulevard of broken dreams. While expecting the social return they need to understand that something is not always possible or even some times, not desirable. Another major concern is that the focus might shift from achieving a social goal and more on financial return. This may happen when there is a pressing need for additional investment and the management is not efficient enough to utilize organization’s resources effectively and efficiently. Therefore, to ensure the success of investing for both social and financial return, the investors need to be a bit more realistic and hire a competent management team.
Last part of this SB series will focus on the Social Stock Exchange.

WRITTEN BY: Sazzad Hossain

Sazzad Hossain is an Assistant Vice President at LightCastle Partners where he brings diversified work experiences from MNCs like HSBC and British American Tobacco. He holds a Bachelor Degree in Business Administration from University of Dhaka. He is also enrolled in the MSc Marketing Program, Class of 2015, in University of Manchester. He can be contacted at [email protected]

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