Investing for Impact: How to Do Well by Doing Good

Climate change has reached a point of irreversibility.

While this statement might have once seemed far-fetched, it’s quickly becoming a stark reality. The current global goal is to limit our global heat rise to 2°C, yet with the continued reliance on fossil fuels and rising carbon emissions, we are on track for a 4.2°C increase. Climate change isn’t our only concern. Socioeconomically, 712 million people still live far below the poverty line, around 2 billion people in the world don’t have access to clean drinking water, and in the fashion industry alone, 92 million tonnes of textile waste is produced every year. Faced with these overwhelming statistics, it’s easy to feel powerless and question what, if anything, there is for us to do. So, as future business leaders and investors, the question is: how can we help drive systematic change and contribute to solutions before it’s too late?

Understanding our current state.

At the core of many of our pressing issues lies the foundation of our economic system – capitalism. This framework, where markets, businesses, and institutions are solely focused on profit, has fostered an environment where unchecked behavior driven by greed often prevails. Much like “technological fundamentalism,” the belief that the unintended consequences of advanced technology can be resolved through further technological advancements, capitalism frequently prioritizes immediate financial growth as a short-term fix, over addressing long-term, systemic challenges such as environmental sustainability and social justice. The consequences of this economic structure became particularly evident in the aftermath of the COVID-19 pandemic where we saw that investment in public goods, education, training, and skills for human capital development, reached a decline below what is needed for individuals to have equality of opportunity and full participation in the economy. The crisis also highlighted how companies must work collectively to tackle climate change, emphasizing the need for effective carbon pricing and stronger market regulations.

Reaching clarity and awareness.

Now that we’ve taken a step back to better understand our current structure, we are left with the realization that the systems that our economy and society are built upon, are ultimately shielding us from deeper realities: the environmental costs of unchecked growth and the social inequalities it perpetuates. If this is the case, what is there left for us to do? How can we become not only better investors for ourselves, but also for our world?

In Arguing for Our Lives: A User’s Guide to Constructive Dialogue, Robert Jensen introduces the concept of false alternatives, where people reduce complex issues to binary options – often framing one option as unattractive for practical and/or moral reasons. As a result, this narrow view limits individuals from exploring the full range of possible solutions. Similarly, when it comes to balancing social and environmental responsibility with financial returns, we’re left with the belief that you must either sacrifice substantial profits for positive impact or abandon social and environmental goals to maximize financial gains. However, a third path does exist—impact investing—which offers the potential to achieve both meaningful change and financial returns, bridging the gap between these two perceived extremes.

Unpacking impact investing.

Impact investing involves making investments with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investing should not be confused with ESG (Environmental, Social, and Governance) investing as they’re fundamentally two different styles. While ESG is used as a risk metric to assess how well a company manages potential risks and opportunities related to sustainability, impact investing goes further by prioritizing investments with clear social and environmental objectives. It also integrates impact assessment with financial analysis when evaluating investment opportunities. The objectives of these investments may vary among investors, but the majority are aligned with the UN’s Sustainable Development Goals (SDGs).

The Global Impact Investing Network (GIIN) identifies four key elements that define impact investing:

Intentionality – the investor’s goal is to create positive social or environmental impact through their investment choices

Investment with return expectations – investments are expected to produce financial returns, or at least, a return on capital

Range of return expectations and asset classes – impact investments span various asset classes, such as fixed income, private equity, and venture capital, with return expectations that can range from concessionary (below-market) to risk-adjusted or above-market rates

Impact measurement – a defining feature of impact investing is the investor's commitment to measuring and reporting the social and environmental outcomes of their investments, ensuring transparency, accountability, and contribution to the growth and improvement of the field

One of the biggest hurdles within the impact investing community is establishing metrics and frameworks used to conduct impact measurements. The approaches can vary between firms and investors, but ultimately, the overarching goal is to employ a quantifiable and trackable method for assessing impact. Similar to how discounted cash flow (DCF) models track and predict a company’s future cash flows, impact measurement frameworks are used to project the level of social or environmental change companies are expected to generate. One notable example is the Rally Inclusive Impact Methodology (RIIM), developed by Rally Assets, one of Canada’s leading impact investment firms. This framework evaluates the entire system a product affects, creates an evidence-based impact thesis, and establishes quantifiable metrics to measure the progress toward a product’s overall impact goals. As the field continues to expand, large institutions are also increasingly contributing to the creation of standardized and centralized methods for assessing impact.

Demystifying skeptics of impact investing.

You might be wondering, if impact investing is such a viable option, why doesn’t everyone invest this way? More often than not, the hesitation stems from preconceived notions that impact investing compromises financial returns for the investor. However, these assumptions are increasingly being disproved. For instance, Rally’s Global Equities Impact Fund delivered a net return of 6.8% in 2023 and 2.6% year-to-date. In a case study completed by Impak Analytics, a SaaS impact assessment platform, the company compared an equally weighted impact portfolio of 62 top-performing impact stocks (aligned with the UN’s SDGs) against market indices. The results showed that, from May 2016 to May 2018, the share price of the impact portfolio outperformed the S&P 500 by 38% (Figure 1). Additionally, a survey of 130 investors – including limited partners and fund managers – revealed that 83% of respondents found the financial returns of their impact investments either met or exceeded their expectations (Figure 2). These data points serve as tangible evidence that impact investing is not only about creating positive change but also about delivering competitive financial performance. This challenges the misconception that one must sacrifice returns to drive social and environmental outcomes, further emphasizing that impact investors care equally about financial returns as they do about the degree of impact.

Figure 1: Survey data on performance feedback for impact investments

Figure 2: Survey data on performance feedback for impact investments

You’ve probably also thought that, compared to the vast array of high-growth industries and companies that don’t prioritize socio-environmental impact, there simply aren’t enough impact-focused companies to generate substantial financial returns. However, it’s important to note that impact investing manifests in many forms. As an impact investor, you aren’t confined to the nearest renewable energy, all-sustainable, and environmentally friendly company – you can invest in companies across a wide range of industries in both the public and private markets. For example, Adidas, the world’s second-largest sportswear manufacturer, may not be top-of-mind as an impact stock. However, the company’s commitment to sustainable practices, such as its ‘made to be remade’ product cycle, is paving the way for systematic change in the apparel industry. This approach not only promotes environmental responsibility but also aligns with the UN’s mission for sustainability and circularity within the textile value chain.

Beyond public and private markets, investors can explore green bonds, social impact bonds, emerging markets, and early/late-stage startups. Take Good & Well, a Canadian venture capital firm, whose portfolio includes early-stage impact companies like Kotn and Everist – both of which have achieved overwhelming success, proving that a business model can be sustainable without sacrificing profitability. These examples are only a few demonstrations of how the two goals are not mutually exclusive, and that a world exists where it is possible to do good while generating financial returns.

Reading between the lines.

In a world where financial returns often take priority over social and environmental costs, it’s crucial that we critically assess the information we consume. This is especially the case as we evaluate companies – such as those in oil and mining – and question whether their actions genuinely align with their stated sustainability and corporate responsibility goals. During a conversation with an impact investing professional at Rally Assets, they pointed out a key contradiction: while some financial institutions invest in renewable energy and climate initiatives, critics argue that many remain involved in industries that exacerbate environmental damage. This brings us back to our initial understanding phase: our economic development has historically been driven by unsustainable business practices. As a result, meaningful change requires a collective and systematic rethinking of these foundational issues. Thus, as individuals, it’s important to hone our critical thinking skills and contribute to driving impact.

The importance of impact investing and deploying capital in a meaningful manner.

Returning back to my initial question – what can we do? – the answer is clear: we should try to better our understanding of what it takes to drive real change, enabling us to contribute more intentionally. This past summer, I took a step in that direction by pursuing a role in impact investing. Over four months, I witnessed firsthand that it is possible to achieve financial returns, while also prioritizing the systemic impacts companies can create. This experience showed me that, even as a student, my contributions—though they may be small—can leave a meaningful mark.

Ultimately, this article isn’t to suggest that impact investing is the only solution to the urgent global challenges we face today, nor is it a one-size-fits-all solution. Instead, it serves as a challenge for investors to think critically about where they allocate their capital and to question the status quo. By adopting impact investing, we have the opportunity to achieve both financial returns and meaningful social and environmental change. Overall, the goal is to encourage our generation to take concrete steps toward lasting, positive impact. Rather than asking, "What can I do?", we should begin by shifting our thinking to "What can I do right now, and how can I start making an impact today?"