Investing in impact: the changing direction of investment

Traditionally, investment decisions are solely driven by potential financial returns and market dynamics without regard for measurable social or environmental returns. The approach naturally leads to investments which can harm our natural environment and social communities. Impact investing, on the other hand, incorporates the traditional financial considerations while also emphasising the importance of generating positive social and environmental outcomes. In this article, we will discuss the key factors that drive the ‘traditional investing’ approach versus the ‘impact investing’ approach employed by EIT Urban Mobility. 

The key factors of traditional investing 

Financial opportunity 

In this approach, investment decisions are driven by the potential for profit, with careful analysis of projected returns and risk assessments. Financial opportunities are evaluated based on historical performance, market trends and future growth potential. Investors seek opportunities that promise the highest returns on investment (ROI) and prioritise sectors and product types which consistently perform well. As a result, significant investments in areas with great social or environmental benefits, but less financial potential can be overlooked.  

Market size 

Unsurprisingly, market size also plays a crucial role in the ‘traditional investing’ approach, as the bigger the market the higher the ceiling for financial return. Larger markets offer more opportunities for businesses and can support increased scalability for the companies that receive investments. Investors assess market size through a variety of metrics, guiding them towards industries with expansive growth prospects. However, if only seeking the bigger markets with high growth potential, this too can create a disparity between smaller, less ‘significant’ countries and those with bigger market pull.  

Sustained profits 

The ability to sustain profits over the long term is essential in this form of investment, as it is in impact investing. Investors seek companies with a proven track record of profitability and efficiency of operations, both of which indicate a company’s resilience and ability to navigate to the market. As explored in the article Investing in impact: the 5 challenges of assessing early-stage startups' impact quantifying these factors can be difficult when investing in early-stage startups.   

The driving factors of impact investing 

Critical need  

While a traditional approach to investing considers financial opportunity, impact investing seeks to address a critical need. This means focusing on opportunities that tackle pressing challenges or create solutions that have a meaningful and transformative impact on society and the planet. In order to identify such needs, a team that understands the most urgent problems faced by the variety of communities in your local or regional area is paramount.  

Scale of impact 

Instead of purely focusing on market size, scale of impact is also considered in this approach. This refers to the breadth and depth of change an investment can make, or conversely, the lack of impact when avoiding an investment. Impact investors aim to support companies and initiatives that can reach and benefit as many people as possible and/or improve environmental conditions. Investments are evaluated based on their potential to create a positive change rather than the potential of the market size to benefit the investment. In addition to scale, the depth of impact also plays a part; addressing root causes of issues and providing solutions which lead to long-lasting positive outcomes. 

Duration of impact 

The duration of impact considers the sustainability and longevity of the positive change generated by an investment, in a way that is akin to the traditional investment view of sustained profits. This is an important factor to consider as impact investors should always prioritise initiatives that create lasting benefits rather than quick fixes. This means supporting projects and organisations that have sustainable business models, strong governance and the ability to maintain and grow their impact over time.  

A shift in investor priorities 

The rise in prominence of impact investing reflects a broader change in investor priorities, where financial considerations are becoming more balanced with impact outcomes. For impact investing to be sustainable as a business model, it must generate returns, but not at the expense of positive social and environmental outcomes. The evolving investment landscape underscores the growing recognition that financial success and social responsibility can, and should, go hand in hand. Investors should always consider the wider effects, both positive and negative, before investing. To learn more about EIT Urban Mobility’s approach to impact investing, see the 2023 Investment Portfolio Impact Report.