Is Blockchain Scaling Social Impact Investing?

So how would you like to make the world a better place and make money while doing so? Well, that’s what social impact investing aims to do.  With impact investing, you get the best of both worlds because you get to help yourself and others, too.

“Do good” Investment Approach

What is social impact investing?  It is the investment of capital with the specific objective of achieving a positive social or environmental impact as well as a financial return.  This is different from traditional investing where our only objective is to achieve a financial return.  It is even different from responsible investing where we refrain from investing in companies that result in harm to others such as a tobacco company.  Impact investing actually goes beyond the idea of “do no harm” to “do good” for society.  

With social impact investing, we hope to make the world a better, safer, less polluted, and healthier place.  We hope to solve real-world problems and improve the quality of life in underdeveloped regions.

Impact investing is a social investment approach that crosses all asset classes, themes, and geographies.  It has seen an annual growth rate of about 15%, with over $500 billion invested as of 2019, according to the Global Impact Investing Network.  

Social Impact Means More Than Just Charity

Impact investing is different from just charity or philanthropy.  It invests in local businesses that are better able to understand and solve local problems in a sustainable way. The expectation is that these companies will generate a profit for investors.  Because investing in companies that don’t make money would just be nothing more than charity.  In fact, generating a profit is an important aspect of impact investing, as it sets the bar high for companies seeking funding.  It also helps to attract more investors to this space.

Impact investors are looking to jumpstart a profitable business that is able to solve a social problem for the long term, not just for the short term.  It is only by providing long term sustainable solutions that we will achieve our goal of creating a better society.

Make the World a Better Place

What are some examples of where you can make an impact?   One area where you can invest in is businesses that provide services or products that improve the quality of life.  Perhaps it is a company that makes solar lamps for developing regions or provides clean drinking water.  Or maybe it’s a company that develops natural washing products or healthy foods.  We may even invest in businesses that engage in fair trade practices, that provide honest working conditions, or that bring jobs to those with fewer opportunities.  

making the world a better place with social impact investing

Barriers to Mainstream Adoption of Social Impact Investing

What are the barriers to mainstream adoption?  Impact investing holds promise as a means to solve real-world problems.  But there are some challenges to its mainstream adoption as an investment vehicle.  Opportunities to invest in social and environmental causes are often in underdeveloped regions.  In these areas, there tends to be a lack of norms and standards to regulate this sector.  

This can create issues with transparency. Especially when data about how funds are being used must be provided back to investors.  It also makes it difficult to measure the results of their impact.  Oftentimes, data is stored on outdated, inefficient systems. This makes it challenging for data input and analysis. As well, there may be a reliance on highly fragmented local networks. Or even on centralized institutions that may be unstable.   

Having transparency and reliable data is critical for operations and fundraising.  After all, investors want to know that the funds being directed to specific causes are actually worthwhile projects that are doing some good.  Also, the lack of transparency and trust can be a challenge in creating investment-grade products that will be viewed by investors as legitimate vehicles for generating a meaningful return on investment.  In fact, this is one of the main threats to the growth of impact investing.

Is Blockchain the Solution?  

As a recap, we know blockchain as the technology that underpins and powers bitcoin. This technology was later extended to other cryptocurrencies.  However, It is also emerging as a technology that is finding applications in areas other than cryptocurrencies.  Its use of a decentralized, distributed ledger makes it particularly useful for applications requiring transparency such as in the case of impact investing.   

Blockchain creates accountability because data is not stored by any one person.  All users on the network have access to the information and share in its record-keeping.  To increase trust among users, it is necessary to have a ledger that can be accessed by all users.  All transactions performed within the network are completely transparent.  Any user can, at any time, see the funds that are received and how they are being managed.  They can track how their investments are contributing to a cause, and whether it is fueling the desired outcomes.  The records are immutable. This means that once recorded, they cannot be changed.  

Blockchain is also able to cut out the need for a financial middleman, resulting in reduced transaction times and service fees.   This increased efficiency means more of the capital allocated for a cause will be used for that cause.  

Social Impact Tokens for a Better World

Blockchain also allows for the tokenization of investment vehicles which will allow for greater access to investor pools.  Tokenization is the process of issuing a blockchain-based token to represent a real-world tradable asset.  

Impact tokens, which represent a UN Sustainable Development Goal-related (SDG) impact, are currently available.  The impact is usually measured by some quantifiable, unit-based metric which is linked to the activity for which it was created. 

These tokens can be used as a way to fund the activity, track impacts through supply chains, and substantiate SDG claims. The public can currently access some of these tokens through Initial Coin Offerings (ICOs).  An example of this is SolarCoin (SLR) which awards one SLR for the verified production of 1MWh of solar power).    

Tokens allow for the scalability of fundraising efforts.  Through low transaction costs, projects can offer fractional ownership.  This can appeal to a wider number of investors, as they have the option of investing as much or as little as they want, depending on their interest in the cause and appetite for risk.  For example, impact investors can invest as little as $1 to the Sun Exchange which funds solar projects in Africa.

Tokenization can help create new innovative investment products, provide liquidity, and create secondary markets for previously illiquid assets.  By doing so, it can open the way for mainstream adoption by both institutional and retail investors.  

image of helping hands as pertains to social impact investing

Some Challenges of Using Blockchain for Social Impact

The use of blockchain technology is not without its challenges, however.  Consider that blockchain data blocks can only be up to a certain size.  For example, one Bitcoin block can only hold 1MB of data, which limits its transaction capabilities to three to four per second.  Limitations to data block capacity may limit scalability for big projects.  But for a smaller scale impact project, this may not necessarily be a hurdle.

Blockchain technology is an emerging technology.  As such, there are still uncertainties around the regulation of blockchain uses.  For us, we can’t predict what regulations will be imposed or how strict they will be.  Regulatory costs or restrictions may make certain blockchain projects prohibitive.

A third challenge, and perhaps the greatest hurdle, is the lack of real-world applications of this technology.  Many social impact blockchain projects are still in the pilot stage and have not yet been verified for scalability and impact. To gain expertise and credibility it is necessary to move from the experimentation stage to full-scale implementation.

What’s Next for Impact Investing?

Social impact investing holds promise as a way to solve social and environmental problems by attracting investors who can both fund the solutions and receive a financial return on their investment.  However, it is still in its early stages of development and is still undergoing a trial and error approach.  

One of the major hurdles to the growth and acceptance of impact investing is its lack of transparency and accountability.  Blockchain technology can offer a solution to this problem through its use of a distributed ledger to track funds and measure its impact.  Blockchain also allows for the tokenization of investments, which can appeal to a wider group of investors.  You can currently see impact tokens being used to add liquidity to investment vehicles. Additionally, these tokens provide secondary markets and attract investors both big and small. 

Blockchain technology has proven to be a useful tool when it comes to collecting, measuring, and validating data, especially in parts of the world where data is not easily validated. In that sense, it can help to scale impact investing, by taking projects from a pilot stage to full-scale implementation.  However, the one thing blockchain cannot do is assign a value to the outcome.  Did the outcome actually achieve a positive social impact on society?  This is something that is subjective and is something that technology alone cannot solve.    

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