Impact Investing or Thematic Investing: what's the difference?

Giving meaning to one's assets, having an impact, being a responsible investor... Fine intentions that deserve to be clarified. In the vocabulary of responsible investment, the expression "positive impact" is often used. "Impact investing" has emerged in recent years...

Impact investing: definition and illustrations

Let's look at what impact investing is all about and how it differs from responsible investing. The definition given by the GIIN, the Global Impact Investing Network, seems fairly simple: investments made with the intention of producing a measurable social or environmental impact as well as a financial benefit. Impact can be defined as the final effect that an action produces on beneficiaries, an effect that has been sought in advance and responds to a clearly identified issue. For example, for young people who drop out of school, the desired effect will be to get them back into a life project (study or job), or for people who are far from employment, the desired effect will be to reintegrate them into the world of work. The most well-known impact investment sector is that of micro-finance, highlighted by the Nobel Peace Prize winner Mohamed Younus, who developed this activity in Bangladesh during the great famine of the 1970s, in order to lift people who had no access to the banking sector out of extreme poverty. In developing countries, micro-loans, mostly granted to women, are generally 97% repaid. With these very small sums of money, they can develop a small agricultural, craft or commercial activity, for example. The people who borrow thus get out of extreme poverty, and that is indeed the intended impact.

The three characteristics of impact investment

In addition to financial return, impact investments are characterized by three words: intentionality, "additionality" and impact measurement. Let's look at each of these three terms.

Intentionality of the investors is the fact that they identify a cause to be solved through their investments. For example, the cause of professional integration, the fight against poor housing, or the cause of extreme poverty, to take the example of micro-finance.
Additionality means that the provision of funding by the investor enables the impact to be achieved, and that without it, the desired effect on the beneficiaries would not have been possible. For example, by providing so much investment we will be able to reintegrate so many more people, by financing a microfinance institution we will lift so many people out of extreme poverty.
Finally, impact measurement involves elements of measurement, which are not always easy to characterise according to the nature of the project. In the case of microfinance, it is the number of people who have become financially independent thanks to the microloans granted. Impact measurement should not be confused with activity measurement, which in the example would be the number of loans granted by the microfinance institution.

These three criteria make it possible to distinguish impact investment from thematic investment, which is one of the approaches of socially responsible investment (SRI).

Thematic investment: focus on the area rather than the effect to be achieved

In thematic investment, the aim is to invest in companies whose activity covers one or two areas of sustainable development. For example, in thematic products in the water sector, companies are selected and financed that operate globally to improve access to water, to save it, to make it drinkable, etc. If the investors' intention is to enable with their investment to give access to water to people who are deprived of it, it can indeed be thought that the selected companies partly fulfil this objective. However, it will be difficult to prove additionality, i.e. how the capital provided was actually used to provide access to water to more people who are deprived of it. The capital may also have been invested in another area, such as the replacement or maintenance of existing networks. And it will be even more difficult to give a measurable impact to the desired effect, i.e. to bring clean water to those who are deprived of it. It is because of these three characteristics, intentionality, additionality and impact measurement, that impact investment most often concerns non-listed companies and generally companies with a high societal utility. These are long-term investments with a high risk of capital loss.

In summary, it can be said that for the same social effect, thematic investment suggests that it may be achieved in a diffuse and non-measurable way, whereas impact investment will prove it. These impact investments are not yet available to individuals because the associated risks are significant and multiple. At Societe Generale Private Banking, we want to accompany our clients in the area of impact and are currently exploring all avenues to offer robust solutions that help finance a more sustainable economy while having a risk profile in line with their expectations. Please do not hesitate to discuss this with your banker, who will discuss your investment objectives and your desire for impact with you.

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