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Can you invest for impact and still see a financial return?
In my last post, I explored the topic of whether investing into SEIS or EIS eligible-opportunities can reduce your tax bill to zero.
There are so many 'ifs and buts' in our industry, I particularly enjoy looking into scenarios like this. It allows me to gain a perspective that you wouldn't generally receive just by looking at, for example, investing into the Enterprise Investment Scheme.
As such, today I wanted to explore another scenario; one that I believe crosses the minds of many investors in this space - and that's whether it is possible to still make a financial profit when you invest in opportunities primarily for impact.
What is impact investing?
Let's start at the beginning.
Impact investing is a relatively new term to the investment industry, even though it's been happening to some extent naturally throughout the history of investing.
In essence, it is the act of investing into a company that has the primary purpose of making a positive impact socially, to the environment, or within society.
Having been a phrase that's seen more traction in the US than most other parts of the world, it's thanks to high profile entrepreneurs and investors such as Elon Musk that wider attention is being brought to the term ‘impact investing’.
A perfect example of an impact investing opportunity, Musk’s technology company Tesla is focused on producing sustainable energy in the form of solar for the world.
Similarly, Google are working on unique projects that will have a global impact - Project Loon, for example, has the aim of providing internet to everyone on the planet, including previously unreachable ‘no internet’ zones.
Interest in the idea of impact investing has been growing over the years, and as a company we really do feel this is a great thing.
After all, if you had the option to make a real difference, I personally feel most people would at least take the time to find out more about the opportunity.
The risk vs return of impact investing
With most investments there is a level of associated risk. This is an accepted fact amongst investors, and sometimes these risks can be greater than others, something that's particularly the case with brand new startups or companies that have only been operational for a short amount of time.
It's for this reason why you should always seek professional, financial advice before making investments, and only make investments with money you can effectively afford to lose - whilst the purpose of investing is to see growth over time, this doesn't always happen.
Likewise, however, the risk of investing can pay off to a considerable scale.
Take Uber as an example. Having $200,000 invested into it back in August 2009 (just months after the company's inception in March 2009), the company's popularity rocketed over the years, and now has a valuation of over $69 billion.
It's important to point out this doesn't mean every new company that appears is going to see the same levels of success as Uber, but there are undoubtedly many more that will.
So, if we look back at the original question of whether impacting investing can return a financial profit to investors, the reality is it undoubtedly can.
There are obviously numerous considerations to make, but if we break it down into whether an investment into a company that has a focus on making an impact on the environment, society or socially can see a positive financial return, the answer is yes.
But what's arguably more important to appreciate is financial return isn't the only outcome of an impact investment.
The investment you make can actually be making a true difference in the world, and being a part of a company that solves a genuine problem can be a real highlight as an an individual - and if the company you invest in goes on to thrive financially, many impact investors would simply class that as an added bonus.
Impact investing tax reliefs
If we look at impact investing into newer, earlier-stage companies, these companies can also offer very generous tax incentives for investors.
When making full use of schemes such as the Seed Enterprise Investment Scheme (SEIS) or the Enterprise investment Scheme (EIS), investors can benefit from some of the most generous tax reliefs currently available in the UK - with SEIS, for example, you could claim up to 50% of your investment back on your income tax bill.
As with any investment into EIS or SEIS, there are conditions that need to be met, but for the most part these will simply happen naturally for many investors into such schemes - holding your shares for at least three years, for example.
The importance of diversification
One of the most important points to consider when building an investment portfolio is diversification.
By taking an active approach to diversification, you mitigate the risk of your investment portfolio, as you don't rely on what could, for example, either be a small number of investments in total, or conversely, a large number of investments all within the one industry.
Given the nature of impact investing (a company can have the primary focus of making a genuine impact almost regardless of their industry), it generally offers a great chance to get involved in multiple opportunities across a wide range of sectors.
This itself is a great way to mitigate your risk of losing your investment and potentially maximise your return.
Investing in multiple opportunities will also give you the chance to have a really diverse investment portfolio, with some really interesting companies and organisations in there.
How do you find impact investment opportunities?
Sometimes these investment opportunities can be hard to come across, especially if you are completely new to the investment market.
Platforms such as ours in GrowthFunders exist to provide investors with high quality co-investment deals.
Our investment opportunities are carefully selected and undergo thorough due diligence to ensure they are the best possible investment opportunities for our investor network.
There are some truly fantastic companies out there that are driven to make a true difference, and when they look to raise investment, our aim at GrowthFunders is to support them through the process.
Offering truly great impact driven investment opportunities to our investor network, we genuinely aim to work with the investee companies through the entire investment readiness process, so to ensure they are presented to our investors in the best possible way for both parties.