What investors mean when they say they want ‘social impact’

This content originally appeared in part on TechCrunch.com. It was sponsored by CohnReznick and created by TechCrunch Brand Studio. 

Last year was a time in which nothing was certain, everything changed, and just about everyone wanted to “do better.” At the same time, “social impact investing” started to land on the tips of investors’ tongues – sometimes awkwardly, as if it were meant for someone else to say first.

“Social impact investing is actually not a new concept,” says Alex Castelli, managing partner of Emerging Markets at CohnReznick. “But given the global events over the past couple of years, it has risen to prominence. All indications are that it will continue to gain momentum as individual to institutional investors will continue to embrace the missions of the companies in which they consider making investments.”

So, what do people mean when they say ‘social impact’?

Social impact investing can mean a lot – that’s what makes it tricky. At a baseline, investments around social impact usually regard a company’s sustainability and its overall contribution to society.

When these investors say they want to see companies do more social good, they mean they want to see business decisions being made that align with sustaining the future – and the future of a business’s value. They want to know that a company will be profitable tomorrow, which is why they’re readapting to what they understand tomorrow might look like. We’re living in a time in which social impact has widespread backing, perhaps unlike any other time in history.

What does this actually look like? There are firms solely dedicated to social impact investing. For example, Ethic, an investment platform that recently raised $29 million in its Series B, helps their clients build portfolios based on sustainability issues. The firm evaluates companies on criteria ranging from non-discrimination policies to emission reduction promises. It also divests when it determines necessary, such as its efforts to pull the plug on companies that profit from private prisons.

A solid metric for this tidal wave of thinking is the automobile industry: A slow mover (and huge culprit) in environmental concerns, there’s now a financially incentivized rush to do better. President Biden’s $174 billion pledge to support EV vehicles shows how deep the sustainable focus is trending.

Where is social impact investing heading in 2021? 

Social impact investing is not a fad, and it is not a one-and-done project. It will grow. The more socially conscious behavior changes the expectations of consumers, the more integrated it will become in investment decision-making.

“Impact investing does not equal not-for-profit or philanthropic endeavors,” explains Asael Meir, partner and Technology industry leader at CohnReznick – it can actually be very profitable. He points to Tesla as an example; early investment in Tesla may have been considered an impact investment, but now consumer demand for EV products is driving valuations.

How should an investor evaluate social impact opportunities?

1. “Define social impact investing in the context of your investment philosophy,” says Castelli. “Focus on those companies that fall within your definition.”

This might require evaluating a company’s mission, analyzing the diversity of the board and management systems, or evaluating the end consumer. Taking a fine-tooth comb through the business with a newfound lens of social impact might help you to find opportunities you never saw before. For example, is the business reaching all of the audiences it can geographically and socio-economically? Many businesses can stay true to the capabilities of their products and services while expanding into new markets and thereby helping more people: Do it mindfully, and that can be socially impactful.

2. When making a social impact investment, don’t be afraid to enter new categories or take on smaller, bolder investments. For many social impact investors, there’s a so-called “middle ground.” These are the types of investments that are neither scrutinized to the same level as the firm’s traditional investments nor written off as philanthropy. They are meant to serve as building blocks for technologies and processes that someday could be both sustainable and profitable.

3. Develop metrics for success. Nearly a century ago, a shift in fiscal accountability led to the basic invention of accounting as we know it. A similar shift is underway in regards to tracking your social impact. When you are evaluating a company, look for how they define specific metrics of their social impact success.

Every industry requires unique metrics – not every sustainable impact can be measured in units of carbon dioxide. Companies with unique propositions can find value in broadly shared metrics, such as the Stakeholder Capitalism Metrics released by the International Business Council (IBC) earlier this year.

How should investing firms think about their own social impact?

Ultimately it’s a two-way street. It’s in the benefit of both companies and investors to explore venues for social impact. Not only will each party see the outlined benefits, but each side will be able to better understand each other’s decisions down the line. Trust becomes established. 

Often it’s the investor who is behind the curve – not the company. Take diversification of leadership, for example. A study showed that boards perform better when at least 30% of their members are women. Yet VCs tend to be homogenous; recent data from Women in VC showed that only 4.9% of VC partners in the U.S. are women. To build trust, it’s important for investors to mirror the expectations they have of the companies in which they invest. 

When it comes to “social impact investing,” it’s about long-term good.

Interested in hearing how other investors are thinking about impact investing? CohnReznick is hosting a roundtable discussion open to investors of all types on May 4, 2021. Save your spot here.