Even today, values-based investing isn’t always well understood by the public. Confusion arises, in part, due to a handful of common misconceptions about what investing for a social purpose really means. These stubborn myths may hinder impact investing from growing to its full potential. So, it’s crucial for those who know—and care—about impact investing to spot these inaccurate claims and respond to them. Here are some common misconceptions, and the realities they obscure.
Impact Investing Means Accepting Lower Returns
It’s often thought that investing for social good necessitates conceding financial returns, and some investors have intentionally accepted below-market returns as part of their strategy. But this is by no means a requirement: The data shows that impact investing can be profitable. In a 2016 survey, for example, the Global Impact Investing Network found that the majority of values-based investors aim for risk-adjusted market-rate returns. Almost 90% of respondents reported that their financial returns were either in line with their expectations or exceeded them. And research by the Wharton School shows that impact funds that seek competitive returns can perform comparably to market indices.
Values-based Investing Makes Little Difference in the Real World
Not everyone has an intuitive understanding of how investing can create positive change in the world, and some may suppose impact investments to be inept at bettering the world. Nothing could be farther from the truth. Impact initiatives have brought cheaper groceries to food deserts, supported health care clinics in underserved areas, and deployed solar energy across the planet—and that’s just scratching the surface. Creating concrete solutions, impact initiatives tackle a broad, global range of social and environmental challenges.
Impact Initiatives Are Repackaged Philanthropy
Both philanthropy and impact investing are dedicated to improving the world. But unlike charities, impact initiatives aim to earn a profit while simultaneously providing funding action and innovation in a needful area.
Impact investments also require more of a long-term commitment to a cause than philanthropy. Writing a check to a group that advocates for paid sick leave, for example, has a different commitment level than overhauling your investment strategy to prioritize companies that provide paid sick leave.
Impact Investing Has Reached Its Peak
Impact investing is experiencing strong growth. CNN reports that impact investment assets soared from $50 billion in 2010 to $114 billion in 2017. Major institutions like the W.K. Kellogg Foundation and Goldman Sachs have recognized the power of values-driven investing and joined in. And looking to the future, millennial investors have embraced impact investing with significant force. Thus the space is poised to grow further as millennials take on more responsibilities at foundations, family offices and businesses.
Innovative approaches tend to attract detractors. As impact investing continues to mature, more initiatives will succeed and better data will become available, providing ever-strengthening proof that impact investing makes a difference and is here to stay. A day may be coming very soon when these myths will be firmly put to rest.