“Greed, for lack of a better word, is good. Greed is right; greed works. Greed clarifies; cuts through and captures the essence of the evolutionary spirit.”
With these words, Gordon Gekko, a corporate raider in the 1987 cinematic classic – Wall Street, launched into his now-famous “greed is good” speech arguing that investment professionals have no choice but to put brazen greed above all else. But, as the movie eventually portrayed, while unrestrained greed unarguably has its merits, it is ultimately destructive.
To avoid prison sentences like Gekko or collapsing like Enron or the Lehman Brothers, investment professionals and funds have come to realize the value of incorporating ethical considerations into their decision-making processes. Even better, they have also realized the value of social investments – usually referred to as social impact investing.
This class of investments is not only valuable for image returns and market relevance, but they can also be impressively profitable.
In this article, we explore the concept of social impact investing, including a few examples of funds from across the UAE, the MENA region, and the broader global financial markets that have achieved significant successes with social investments.
Social impact investing
As its name implies, social impact investing is a form of investment where measurable social and environmental outcomes are weighted the same as financial goals.
Although they still have the usual goal of maximizing profits, social impact investments are primarily set up to contribute considerable positive change to society. Social impact investments are fast becoming popular in the finance industry and are now the most sought-after alternative investment strategy.
Today, as many as 80% of investors in the global markets now admit to focusing on sustainability and other social issues more than ever before. And they have made a lot of profit at it too. In a 2015 review, German researchers established a correlation between social impact investing and positive returns – as much as 63%.
In another study conducted by Bain & Co, it was established that exits by social-focused PEs in the Asia-Pacific in the last five years recorded a median multiple of 3.4X, compared to 2.5X for regular investments.
Origins of social impact investment
Social impact investing came into the limelight midway through the ’90s, during an era where organized civil society and activism first began growing and developing, drawing attention to and demanding ethical considerations in business practices.
This was also a period when companies underwent a revolution in production processes, and their roles as a component of society became more apparent. And as countries’ economies and financial markets expanded in leaps and bounds, so did expectations for corporate organizations, especially investment companies and private equity funds.
How do companies manage their social impact investment activities?
While some investment companies collaborate with institutes and foundations that exist to execute their social investments, others opt to manage them by themselves.
In these companies, social responsibility and sustainability are often intertwined, and it is not uncommon for a firm to have a Private Social Investment department. Other departments such as Communications and Marketing, Institutional Relations, and Human Resources may also be responsible for the social impact investing initiatives.
The five pillars of social impact investing
There are core pillars that companies interested in social impact investing must consider. These values help them avoid misapplication of funds and retain profitability.
1. Low-income community
By paying attention to those communities with modest or low incomes, usually classed C, D, and E, investment firms can achieve more far-reaching social impacts than they would, serving more affluent populations.
It’s not enough for social investment initiatives to just be good; they have to be scalable. Scalability means the project can experience growth, establish relevance, and in turn, generate revenues and profits to justify the initial investment.
Although social impact investments may not yield immediate profits at inception, they must be designed to pay off eventually. They must be self-sufficient and not reliant on outside donations or subsidies.
4. Primary activity related
Finance companies’ social impact investments must be aligned with their central mission and core operations to achieve maximum efficiency and impact.
5. Impact inclined
Finally, the most important pillar of social impact investment is its impact. Profit is essential, but social impact investments are defined by the degree of impact that they have on society.
Top 7 impact investing firms
Businesses in the UAE, the middle east, and other parts of the world are taking advantage of impact investing. They are becoming aware that they can earn while being socially and environmentally responsible.
There is a misconception that only small businesses seeking popularity engage in impact investing, but that’s not the case. Top companies are also taking advantage of this type of investment to make a difference. Some of these companies include:
1. Crescent Enterprises, UAE
This is one of the top companies driving change in the UAE. The company is known for its perpetual steps in positively impacting the communities in which they work. They have a strong desire for business diversification, leading to a shift in investment focus from broad opportunistic investment to the nation and industry-specific business growth and expansion.
Among Crescent Enterprises’ impact projects, Crescent CEO Badr Jafar has led the company to produce sensor-equipped clothes for blue-collar workers toiling in the oppressive heat of the Arabian Gulf. If you asked Jafar why, he would say, “That is what important stakeholders demand.”
His definition of “important stakeholders” includes young people in particular. He often refers to the youth not as customers but also as the company’s personnel who represent them. When it comes to the firms they work for and the items they buy, millennials are much more aware of their impact on the world around them.
Crescent Enterprises also engages in various other charitable endeavors, social investments, and responsibilities.
2. Rise, UAE
In 2016, Padmini Gupta, a Business School alumnus, founded this Dubai-based company specializing in asset management for low-income workers in the United Arab Emirates.
Rise is a business born out of the desire to make a social impact. Gupta observed a social crisis that had been going on for years and decided to effect change. Loan sharks and their agents routinely exploit millions of low-income individuals across the region, banking on their desperation and naivety.
Rise entered into a business partnership with United Arab Bank (UAB) in December 2017 to provide salary accounts at cheap costs to the unbanked and underbanked population in the UAE.
According to records from Rise, their chatbot has processed over 2.5 million messages and serves over 20,000 different users each week.
3. Dubai Investment Fund (DIF), UAE
Since DIF established its social projects sub-division in 2004, it has placed a great deal of effort into improving the lives of those in need, incorporating it into the company’s wider mission.
DIF’s Department of Social Projects, established in 2004, comprises experts in social studies, applied technology, statistics, and problem-solving. And these experts have assisted the department in consistently delivering the most effective social investment programs to underserved communities in their jurisdiction. The head of this department Mohammed Al Balushi was appointed in 2004 and had more than ten years of experience in a similar position.
In 2004, shortly after it was set up, the department took the lead on a project designed to increase the local populations’ access to clean water and power as part of a broader thrust to improve healthcare and access to medicines. And over the years, it has steadily built a legacy of impact.
Apart from water, in 2004, the DIF has invested in a plethora of other social projects. Some of its most significant projects to this date include – “Education for All” in UAE, “Helping Hand” in the MENA region, and “Technology for Teaching.”
In 2005, as the DIF expanded into the MENA region and then the global markets, its Department of Social project expanded in scope alongside.
With a significant presence in over 17 countries today, DIF has built deep relationships with an extensive network of partners, working together to deliver social investments to different communities around the globe.
One of its most important partnerships in 2005 has been with FINEMI, a fintech company helping to democratize access to financial services for millions of underserved people around the globe.
4. VIRIDIS Investment Fund, Lebanon
VIRIDIS’s social impact investing strategy has been to invest in green initiatives. By providing financial and operational assistance to fledgling green businesses, the fund intends to set an example for the rest of the country by proving that sustainability and profitability are not mutually exclusive.
They also invest in social conditions such as healthy food production, transportation, waste management, renewable energy, eco-tourism, and long-term conservation of nature.
5. Vital Capital Fund, Sub-Saharan Africa
Vital Capital Fund sits on about $350 million in assets under management. The Vital Capital Fund primarily invests in the development of infrastructure, housing developments, agro-industrial enterprises, renewable energy, health care, and educational institutions. The Luanda Medical Center in Angola and Water Health International are two of the fund’s major investments.
6. Community Reinvestment Fund, USA
Community Reinvestment Fund, USA, was created in Minneapolis, Minnesota, in 1988, as a community development finance institution. Its goal is to empower people to improve their lives and communities by providing them with the tools to do so.
For community development projects, the Community Reinvestment Fund collaborates with local private lenders to secure finance from the fund. Examples are loans for expanding a small firm, hiring more employees, or improving energy efficiency.
The Community Reinvestment Fund has over $250 million in assets under management, which it administers through its Community Development Financial Institution Bond Guarantee Program. They have provided long-term loans to community housing projects, health care facilities, charter schools, childcare facilities, and small businesses.
7. BlueOrchard Finance, S.A.
Over 80 emerging and frontier markets worldwide are served by BlueOrchard Finance, a Swiss-based company. BlueOrchard Finance launched the First commercial manager of microfinance debt investment in 2001 as part of a United Nations effort. In the course of the social impact investment, BlueOrchard has invested in more than 200 million entrepreneurs around the world, according to records from Investopedia.
BlueOrchard Finance focuses on eliminating hunger and poverty, encouraging entrepreneurship, creating food production and education initiatives, and focusing on climate change challenges. BlueOrchard Finance currently sits on over $3.5 billion in assets under management.
Benefits of social impact investing
Appropriately done, social impact investing holds a lot of benefits for all stakeholders involved, including the companies, their partners, and customers. Below, we list some of these benefits that can come about from social impact investment.
One of the greatest benefits of social impact investment for finance companies is the greater visibility that it brings. When they work, these programs tend to draw a lot of attention in the media and generate significant amounts of goodwill. And these eventually extend to whatever investment firm sponsors it.
In a world where people are more concerned about sustainability and social consciousness than ever before in history, this increased visibility usually translates to more investors eager to be associated with the fund. Therefore, aside from profits earned by the program, investment firms stand to potentially earn even more as a result of the goodwill generated.
Impressive Return-on-investment (ROI)
The sentiment was that social impact investments bring in less profit than conventional investment strategies, but that has been disproven by recent data. As we have highlighted in an earlier section, not only do these investments earn decent returns, they even return more profits than conventional investment instruments in some instances.
Besides, not all returns are financial. Some are of a more strategic value. For example, by embarking on social programs in their host community, finance companies can contribute to improving the quality of life for members of their staff who have to live in the community; and boosting productivity rates, by extension.
Also, by investing in educational sponsorships, companies can secure a flow of future talent in a market where such might be difficult to find.
Societal progress and advancement
Above all else, social impact investment helps build a better society. In the Sustainable Development Goals (SDGs) published in 2015, the United Nations highlights action points through which investment funds and anyone else can make a meaningful impact on society.
Investment funds solve many social problems through social programs, directly improving the quality of life for millions of beneficiaries worldwide, ranging from poverty alleviation to climate change mitigation.
Redefined culture of investment
Another significant benefit of impact investing for investing funds is that it encourages healthy corporate culture. For every big company that has failed in modern history, from Lehman Brothers to WeWork, significant blame is usually attributed to defective corporate cultures.
And it makes sense; corporate culture determines how the employees behave, and employees’ behavior, in turn, determines the fate of the business.
In the finance industry, where corporate cultures tend to get quite toxic, impact-focused social investing programs can be the little window that lets in some fresh air.
In the modern financial markets, social impact investing has grown to be just as important as conventional investing. Not only does it make financial sense, but it has also been proven to be highly effective in helping businesses accumulate essential goodwill capital.
And most of all, social impact investing has contributed to significant societal progress, especially the massive improvement in the Human Development Index that we have witnessed over the past few decades.
However, companies must not rest on their oars. There are unlimited social investment opportunities, but to maximize impact and profitability, investment managers must pay attention to the fundamentals. Social programs must be properly planned and managed and not just treated as side projects. Only then can the benefits of social impact investing be realized.