To get a clearer perspective on which investments are worthwhile, apply S-ROI’s economic, environmental, and social assessment capabilities for risk-reward analysis
According to Investopedia, impact investing is an investment strategy that aims to generate specific beneficial social or environmental effects in addition to financial gains. Impact investments may take the form of numerous asset classes and may result in many specific outcomes. The point of impact investing is to use money and investment capital for positive social results.
Success in any impact investing scenario depends on knowing that your investment is worth it. Often, the payback metric is based on one aspect of a business or organization — a product with lower greenhouse gas emissions, job opportunities for an underserved population, or preservation of a plot of land. But knowledgeable investors won’t want to take that for granted. They want confidence that their investment has the potential to create a larger impact than simply purchasing carbon credits or paying someone a living wage.
There is a way to assess these potential impacts: Sustainable Return on Investment, or S-ROI is a method of assessing environmental, social, and economic risks and opportunities associated with the company, product, or service you are evaluating for investment. Further, it enables you to put a monetary value on the risks and the benefits associated with the opportunity.
As an illustration, consider a project that will create new jobs. The organization must choose where to locate the project; understanding the relative impacts of the project in the geographies under consideration provides valuable inputs into the decision-making process.
In a highly developed geographic region (such as Western Europe, the US, or East Asia) the knock-on effects could be relatively small — every hundred jobs created directly by the investment might create only a few additional ones. In contrast, the same investment in another region with different economic and social conditions (such as Central America or Africa) could have much broader influence. In situations where every new direct job creates significant new spending power, as many as four indirect jobs can be created for each direct position.
Add in the fact that it could cost much less to create a job in the less developed regions, and you’ll see that for every dollar spent, an investment there can have far more impact than a comparable one in the more developed regions. Jobs in the less developed regions might also have more and larger social knock-on effects, such as reduced food insecurity, lower stress, better education for kids in the family, and reduced emigration.
That’s just one example of the clearer, broader perspective provided by S-ROI analysis, and how it can enable assessment of the value of job creation to the company, to those who get jobs, to the local community, and to the government (in the form of taxes). It can also identify any positive or negative environmental impacts, such as increased GHG emissions from transportation.
S-ROI can also uncover equity issues associated with an investment and help identify ways that the project or company can take a social justice matter and turn it into a win-win proposition — another way of maximizing impact while also minimizing risk to your investment.
The ability to incorporate uncertainly is another strength of S-ROI. It takes into consideration that the future is not knowable, and that impacts will be affected by energy prices, the state of the economy, hurricanes, and other unknowns. This enables the investor to see the best case, worst case, and most probable end results of their investment, and match their choices to their risk tolerance.
Are you willing to take on more risk if the result has high enough potential impact? Or would you prefer a smaller impact with lower risk? You can even identify high-impact, low-risk investments. Why leave that to chance when you can assess it?
EarthShift Global provides classes and tools for S-ROI and can help you develop an analysis platform to assess your investments, so that you feel more confident about the impact of your ventures. To learn more, contact us or call us at +1 (207) 608-6228.