Social Impact Investing is on a meteoric rise. In the past two years, impact investing has grown 42%, from $12 trillion AUM (Assets Under Management) to $17 trillion. For all this tremendous growth, there is still a lack of deep analysis and data that can determine what the true impact and value of a social investment may be. Fortunately, there is one such indicator you can use to determine the true the value of your social impact, both to your bank account and the community it is intended to serve.
Investors have no shortage of tools and data at their disposal to help them determine the potential future value of a stock or asset. A combination of fundamental variables and technical analysis could yield any number of predictive outcomes of a stock.
The same holds true for a social investment. One could look at past Earnings reports, a moving average, and the balance sheet to determine if a particular impact investment or social impact fund is worth investing in.
However, with impact investing, there is a much deeper level of analysis that needs to occur in order to deliver the true value of a social investment. This analysis is called the Social Return on Investment (SROI).
The Social Return on Investment is the attempt to bridge the exactness of an asset’s financial performance with the assessment of the social and environmental impact. By calculating the Social Return on Investment, an investor can determine whether the product or asset can drive real financial return as well as the promised social good to the targeted community as it intended.
There are three steps in determining the total SROI of a social investment. By following these steps, you can determine whether the asset is truly worth your investment or if there are potential headwinds you may not be considering.
The first step is obvious. Never invest in any company or stock that does not have a healthy balance sheet, no matter how worthy the cause. Even if the social investment has a noble mission, if the company is poorly run, your investment will do no good for the community or your bank account. Typically, you would look for a consistent Return on Equity (ROE), low debt to income ratio, a healthy Price/Earnings Ratio, and where applicable, a consistent, growing dividend payout.
If the company has a healthy balance sheet, the next step is to determine the true value of the impact their product will have on its targeted community. If a product or asset is not truly impacting the community it is serving, then it will not likely thrive as an investment.
Here is an example of finding the Value of the Impact:
A PE firm called TPG Growth has created an organization called The Rise Fund. The Rise Fund is a $2 billion impact-investing fund for growth-stage companies.
One of their investments is a company called Dodla Dairy. Dodla Dairy produces and processes fresh milk every day from more than 200k farmers across rural India. The Value of the Impact Rise needed to determine was how much milk Dodla was likely to buy from them and for what price. Rise estimated that investments in Dodla would increase farmers annual income by 73%, from $425 to $735 with a projected sale of 2.6 billion liters of milk over the next 5 years.
Dodla was able to create a tremendous Value of the Impact by supplying these farmers with a reliable buyer so the farmers could spend less time and money on marketing. It provided them with predictability and support needed to make long-term investments, increasing milk production and family income.
This Value of the Impact analysis is a deep measure of a social investment. It takes a bit more digging and research but can become a reliable predictive indicator of the future value of the asset.
This last analysis is more qualitative in nature. Meaning, do you feel that this asset is not only relevant to the trends of today, but can this be easily scaled globally? The answer is not often as easy as it seems.
Let’s take a look how we can use the SROI formula to determine the potential value of your social investment.
Say you are weighing a decision on whether to invest into two popular Impact investing stocks: TAN, the Invesco Solar ETF that is made up primarily of Solar Energy Stocks, and NEXTERA Energy, the world’s largest producer of Wind Energy.
Both stocks had a tremendous 2020 and are poised to continue their gains into 2021. However, by using the SROI methodology, you will be able to determine which stock is more worthy of your investment.
A major factor when it comes to scaling renewable energy like solar and wind, is Land Use.
Solar energy has about a 100x less power density than fossil fuels. This means that when that solar power will need at least 10x more land per unit of power to produce the equivalent output.
Wind projects also generate opposition because of the size of the turbines which can be as the height of a 35-story building. And to produce the energy equivalent of fossil fuels, you need hundreds of turbines.
You can see how scalability becomes an issue, especially in densely populated states and cities like New York, whose ambitious energy agenda has them at 50% renewable energy by 2030.
However, wind power has one big advantage when it comes to scalability. Wind is particularly amenable to moving offshore. The winds are stronger offshore, and the winds speed and direction are more consistent, leading to greater energy potential and efficiency.
So, not only do offshore wind turbines create more power, more efficiently, it solves the Land Use issue for densely populated areas of the country that are near the coast lines, like New York and Los Angeles.
Therefore, your winner should be: NextEra Energy.
This is deep look at how you can crate a full analysis of a social investment. Impact investing will continue to grow over the coming years and you can position yourself for success by doing your research and understanding how to create a SROI view of your investments.