Why invest in Social Good?

Historically, social entrepreneurship has been termed as a ‘hobby’ pursued by people who are not aiming to make huge profits. Through the years, the field of social entrepreneurship has witnessed immense growth. However, during this time period, businesses yielding a social impact have never been classified as profit making businesses. Economic development and inclusion have formed the epicenter of social entrepreneurship. By creating jobs, providing innovative services and products, and promoting sustainability, social entrepreneurship has adequately satisfied its aim of boosting a country’s economy while strengthening its social fabric. Nevertheless, investors aiming to make decent profits have always scurried away from investing in social ventures primarily because of their low profit margins. However, recent times have seen a change in paradigm: impact investments are performing better than traditional bets during the Covid-19 pandemic.

This change in the traditional investing patterns may be a turning point for wealthy investors looking to generate change. The precarious economic conditions of 2020 have catalysed the reworking of several portfolios. Understanding the present significance of social good, angel investors and institutional funds have begun allocating a portion of their revenues and funds to businesses and ventures focused on diversity and social good.

Three categories form the pillars of impact investing: environmental, social, and governance. The three categories, collectively known as E.S.G., have experienced a turning point during the pandemic. Overall, 64 per cent of actively managed ESG funds beat their benchmarks versus 49 per cent of traditional funds , according to a research from RBC Capital Markets.

Social entrepreneurship has been heavily buttressed by government policies in the recent years. The pandemic has witnessed governments of all countries implementing policies aimed at removing the fragility of the economy. Many social issues have been brought to the notice of the government and the public during the lockdown. The online world has experienced countless events discussing social issues like mental health, clean energy, healthy diet, etc. These topics have been the paramount attention grabbers of the current year. Social entrepreneurship ventures modelled after these topics gained renewed motivation and support, not only from the government but also from the general public. Previously, it was reported that impact investments faced more difficulties in developing nation. However, the recent trend, where the number of social businesses have grown exponentially worldwide, has circumnavigated around this impasse.

“ Every time something goes wrong in the world, it’s a boost to impact investing.” - Nany E. Pfund

2020, the year marked by conundrum, caused a shift in strategy. With people realising the importance of impact investments, we can see people flocking to impact investing. The increased interest and involvement in this sphere have generated unprecedented returns. Investments have begun to follow returns. In the first half of 2020, US$20.9 billion went into impact funds, which was just shy of the amount of new money for all of last year, according to a report from Morningstar. This data invalidates the belief of concessionary returns and effectively refutes the case that individuals need to give up returns to make impact investments.

The majority of the impact investments were concentrated on the environmental sector. However, in recent years, the issues surrounding human rights, gender issues, arms, etc have become more prevalent. The investors were confused about investing in companies premised around such complex notions and preferred investing in straightforward choices. Here, 2020 has played a major role in transforming the investors’ portfolios: investing in ways that promote an idea or thesis – like equity – has become more common.

Contemporaneously, skeptics have also pointed out that the success of impact investments is transitory. There has been tremendous greenwashing: asset managers simply tick the boxes that make them look as if they care about impact investments but don’t really put in the work. Skeptics have also credited the bad performance of investments in energy and financial companies with the success of impact investments. The oil shock has been dubbed as the catalyst for the growth in socially beneficial investments.

For some investors, though, the hope is that strong returns will persuade others to remake their portfolios to focus on impact. “The market is changing fundamentally,” Mr. Lemelson said. “This is not just another challenge. It’s the challenge.”

Written by: Arnav Agarwal

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