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INSIGHT: Impact Investing: Is it Right for Your Business?

Updated: Jul 20, 2021

During the past few years, sustainability has been brought to the forefront of food and drink business objectives, largely in response to institutional initiatives such as the UN Sustainable Development goal 2: to end hunger, improve nutrition and promote sustainable agriculture. Large corporations and brands, such as Danone and Ben & Jerry’s, are beginning to split their bottom line into three, focussing not only on their economic success, but their social and environmental impact too. However, whilst major corporations are seemingly playing at pledge Top Trumps, trying to one-up each other with shiny sustainability targets, how can small and medium enterprises be expected to Scale-up, whilst also paying attention to sustainability and social responsibility?


In order to grow, businesses need funding. Available to businesses are typically four forms of funding:

Often, key to business during its growth stage is equity. This funding not only provides a source of cash but can also be used as a resource for networking and mentoring, depending on the type of investment obtained. The problem presented here, however, is that where businesses are increasingly expected to take care of their triple bottom line, a potential investor may be dissuaded by the prospect of their return on investment being side-lined due to the focus on alternative objectives. Impact investment helps bridge this gap, providing growing businesses the scope to produce financial returns whilst also pursuing a more environmentally sustainable strategy.


What is it?

Impact Investment is thought of as being synonymous with other terms, such as ESG (Environmental, Social and Governance), Socially Responsible Investing and Sustainable Investing. Ultimately, it is investment into companies which look to gain a financial return whilst also generating positive environmental and social impacts.


According to the Global Impact investing Network (GIIN), Impact investment is worth an estimated £380bn. This showcases the desire for sustainable investing, and it is an area that will continue to grow.


Impact investment is a vehicle for both institutional investors, such as Venture capitalists , and Private investors, such as business angels. These investors would look to investing into businesses that are both hungry for growth and share their philosophy of environmental and social sustainability. To put it simply: These investors want their money to do more than provide a return. Your business can therefore attract investment whilst also pursuing its sustainability goals.


This may sound counter-intuitive; It doesn’t fix the problem of having to spend more time on caring for the environment than growing your business. After all, Investors still want a return even if your business is working towards being carbon neutral. That being said, these don’t have to be mutually exclusive objectives, and Impact Investment can help them work together.


Why might you want to pursue Impact investment?


It’s still a form of capital


Impact investment is just like traditional equity capital, but through a new lens, and therefore you will still be receiving cash which will make your balance sheet look healthier. So long as your cash is managed well and you stick to an appropriate business plan, the funds generated can help springboard your business into high growth. Impact investment doesn’t stifle growth, in fact, research by Beauhurst suggests that, in the UK, companies that have received investment during both Start and Scale Up stages are half as likely to fail if they were backed by a social impact investor.

Infographic taken from Beauhurst

Investors will help guide you

As with traditional Angel and Venture capital investors, Impact Investment brings with it non-financial benefits such as access to a new network (i.e introductions along the supply chain) and Mentoring. The way it differs, however, is that those investing in social and environmental responsibility will likely have an interest or experience in the ESG movement, and therefore will be motivated to guide you towards fulfilling both your financial and ESG goals.


Sustainability is mainstream

A Consumer study by Unilever stated that a third of consumers are now looking to buy from brands who are shown to be pursuing more socially and environmentally friendly objectives. As an investee of an Impact Investor, your business and brand will be represented as more credible and could in turn lead to more consumer interest. Meanwhile, from a compliance perspective, securing Impact investment means that your company is well on its way towards fulfilling a sustainable business model. With ESG reporting requirements aiming to become mandatory across the UK economy by 2025 (KPMG), your business will find the transition a comfortable one.


You’re part of a force for good

As part of a collaboration project between The Impact Investing Institute and the Good Economy, It was established that Wales (among other parts of the UK) is seen as an area that has either been disproportionately left behind in terms of socio-economic development, or as a result of COVID-19. It was identified that in order to help reverse this, unlocking Impact Investment will aid in not only stimulating your business, but your local area too.


With all this being said, Impact investment can have its drawbacks. As it is growing in popularity, Impact investment is a moving feast, and therefore it is hard to fully understand what these investors are after. Furthermore, by pursuing a triple bottom line, this will initially require more effort to display both positive financial and socio-environmental metrics.


How can you attract impact investment?

As with any investment opportunity, you need a strong business plan that outlines both your sales and marketing strategy, but, perhaps more crucially, what problem you are solving. Key to Impact Investment is solving the problem of a sustainable future. You need to prove that you have an innovative product or process which will help with this problem. This can be a completely new product which totally disrupts the market whilst being environmentally friendly (Algae production, Alternative proteins); or it could be an adaptation of a new product or process, such as shortening your supply chain to within Wales, thus fostering collaboration, creating more jobs, and reducing your carbon footprint.


You also need to be well on your way to, or have a plan for, measuring your ESG impact. Small and medium businesses may not have as much capacity to do this, which is why it is important to, firstly, establish your objectives, and then set measurable KPI’s which can evaluate how well you are achieving these targets. Using carbon footprint measurement software such as Carbon Analytics can help you measure your day-to-day carbon emissions through your accountancy package such as QuickBooks or Xero. Furthermore, pursuing accreditation schemes such as the Carbon Trust or B Lab’s B Corporation status can aid in focussing your objectives and help identify best-practice within the Impact Investment space.


You need to make sure you’re in it for the right reasons. Investors are not just investing in a product, but the people too. This is even more relevant for Impact Investing, where attitudes for change are key to fulfilling that change. You need to surround yourself with like-minded people who not only have the appropriate business acumen, but also have a passion for promoting environmental and social sustainability.


Conclusion

Impact investment is in it for the long-haul. With more and more investment platforms offering a form of Impact Investment fund, the demand for the triple bottom line is growing. This does not have to negatively impact your business, however. Treated correctly, Impact investment can bring with it all the usual advantages of equity investment, whilst also helping you pursue your socio-environmental goals and attracting more customers. That being said, you need to be in it for the right reasons, identifying your aspirations for doing it, your progress so far, and surrounding yourself with the right people is a good place to start. However, if you don’t feel as though you’re ready to take the plunge, don’t worry, as there are plenty of alternative avenues for you to navigate through your businesses growth journey.


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