Investments for Social Impact: Opportunities Beyond Profit

Financial intermediaries and markets channel financial capital to businesses. Traditional companies, driven by profit considerations, have generated market-linked returns on capital. These companies have also produced negative economic and societal externalities. They have struggled to address numerous social issues, leading to market failures. Over the years, governments have endeavoured to mitigate these externalities and market failures through various policies and regulations. Given the scale of these challenges and the government’s limited resources, their efforts have had limited success. Social entrepreneurship emerged, creating enterprises that target specific social problems while being profit-driven. These enterprises were no different from traditional businesses in their need for capital. To satisfy the demand for capital in this market, suppliers inclined to invest in social causes were imperative, specifically, a group of responsible investors. While generating value for shareholders and a wide array of stakeholders, the motivation to invest could not rely solely on social considerations; it had to stay connected to the market rate of return. This led to the emergence of a niche segment of social or impact investing, which helped address the challenges related to transparency and measurability in social investing. Given the urgent need to advance sustainable development goals and the necessity for focused capital to address these objectives, social investing’s significance cannot be overstated. A systematic review of the concepts and practices developed in this arena would clarify the field and its contribution to economic development and welfare. This chapter outlines the trajectory of social investing and discusses the various investment philosophies around this concept, including ESG (Environmental, Social, and Governance) driven investments. It also highlights the positive influence of the unique market-linked feature of such investments and assesses the path ahead.