Have you heard of “impact investments”? Risk assessments play a key role in impact investing, but how?
Let’s first start with some definitions.
What is risk assessment?
Of course, if you are regular visitor to this website you will know that Risk Assessments are a major theme in the majority of our Blogs and Vlogs.
ISO 31000 defines Risk Assessment as the “overall process of risk identification, risk analysis and risk evaluation”.
There are several Blogs and Vlogs on this website that can elaborate much further including (as examples):
- What exactly is risk management?
- The golden rule for risk assessments
- What is risk and the risk equation?
What is impact investment?
Impact investing is a relatively new term, used to describe investments made across many asset classes, sectors, and regions. The estimated value of the impact investment market is $502Bn (GIIN).
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
Impact investments (individual and institutional) target a range of returns from below market to market rate, depending on strategic goals and aspirations set by investors.
Impact investments are rapidly gaining recognition in emerging and developed markets because of an increase in motivators and drivers related to environmental resource management, social development and corporate governance (i.e., ESG: Environmental, Social and Governance).
If you would like to know a lot more about impact investment, I can recommend the GIIN website.
What’s the relationship between impact investment and risk assessment?
Over the last 3 years (2017-2019), as part of a review team, I have been very active with regard to ESG reviews for investors in the emerging market, both individual and institutional.
ESG reviews require an in-depth review on all aspects of ESG and my role is primarily focused on risk and safety management. I have a Blog specifically on Environmental, Social and Governance, if you would like more background reading.
In essence, the ESG review involves a review of the Company’s policies, processes, culture, practices and/or procedures regarding risk and safety management.
Sounds straight forward, however, in reality it requires a deep dive into the systems, processes, culture, practices and procedures. Some might consider this to be an “audit” or “inspection” and perhaps it’s not too dissimilar.
The primary objective of an ESG type review is that it’s a “partnership”. Challenges and issues are identified, reviewed and discussed with investors with a view to improvement.
The above is just a quick summary and perhaps warrants a separate Blog…now there’s a thought!
Let’s face it. Fundamentally, all investors are looking for a return on their investment (ROI). However, at the same time they don’t want to invest in businesses that have poor ethics, working practices, policies, strategy etc.
To minimise their risk exposure investors need to be aware of what’s their risk potential and that’s where risk assessments play a vital role.
Of course, you might now think that’s normal…isn’t it? It is and it isn’t…let me elaborate.
Historically, investors focused heavily on risk exposure related to many other aspects such as Political, Economic, Sociological, Technological and Legal.
With increasing media focus, PR related issues etc., investors want to make sure that they also address other a influencing factors such as Social, Governance, Health, Risk and Safety.
At the end of the day:
- The bottom line (literally) is that investors invest to make a return on their investment.
- Any negative impact on the business will undoubtedly impact their return and they want to maximise their return.
- No investor wants to be hold stock in a failing company or a company with significant risk potential and exposure.
- To quote: “forewarned is forearmed“.