By Ahila Ganesan, Founder of Future LinQ,
In recent years, the investment landscape has undergone a significant transformation, shifting towards sustainable and socially responsible practices. This shift is not merely a trend but a fundamental re-evaluation of how capital is deployed to address pressing social and environmental challenges. At the forefront of this movement is impact investing, a strategy that aims to generate positive social or environmental outcomes alongside financial returns.
The concept of impact investing gained momentum with the introduction of the UN-backed Principles for Responsible Investment (PRI) in 2006. Since then, the number of investment firms committing to integrating environmental, social and governance (ESG) considerations into their strategies has soared. By 2018, PRI signatories had grown to 1,715, managing a staggering USD 81.7 trillion in assets. This surge reflects a growing recognition among investors of the need to align their financial interests with broader societal goals.
Small- and medium-sized enterprises (SMEs) are pivotal in driving positive change across various sectors such as renewable energy, affordable housing, sustainable agriculture and education accessibility. SMEs represent approximately 95% of all businesses globally and are crucial for economic growth and innovation. However, they often face significant challenges in accessing finance, a situation exacerbated by the COVID-19 pandemic.
Recognising the critical role of SMEs in sustainable development, governments and organisations worldwide are increasingly supporting these businesses through impact investing initiatives. In Malaysia, the government has allocated RM8 billion in loan funds to SMEs to finance projects with positive social and environmental impacts. Similarly, Khazanah Nasional Berhad has established the Impact Fund (Dana Impak) with a RM6 billion allocation over five years to support initiatives across various impact areas.
Despite the growing momentum behind impact investing, SMEs still encounter obstacles in accessing finance. One major challenge is the perceived lack of scalability of some social enterprises, which can limit their attractiveness to impact investors. Additionally, there is a need for greater transparency and standardisation in measuring and reporting social and environmental impact, as well as platforms to connect funders with social enterprises.
To address these challenges, SMEs must prioritise independent verification of their impact measurements and demonstrate transparency to build trust with investors. This approach can help mitigate the risk of ‘impact-washing’, where organisations make exaggerated claims about their social or environmental impact to attract investors.
The potential benefits of impact investing for investors, entrepreneurs and society are significant. With the global impact investing market valued at over USD 1 trillion, there is ample opportunity for stakeholders to drive positive change and address some of the world’s most pressing challenges.
Impact investing and ESG are like a compass and a map guiding investors toward a sustainable future. Impact investing points the way by supporting ventures with measurable social and environmental benefits, while ESG provides the framework to navigate ethical investment choices. Together, they chart a course for positive change.
As impact investing continues to gain traction, collaboration and innovation will be key to unlocking its full potential. By working together, investors, entrepreneurs and policymakers can harness the power of finance to create a more sustainable and equitable future for all.
Impact investing is reshaping the financial landscape by aligning capital with social and environmental goals. SMEs, supported by government and organisational initiatives, are at the heart of this transformation. Overcoming challenges such as scalability and transparency will be crucial for maximising impact. The future of sustainable growth lies in the collaborative efforts of all stakeholders, driving positive change and addressing global challenges through innovative and responsible investing.