Social impact investing: let’s put people back into the limelight!

In a world increasingly shaped by social and environmental challenges, investing with social impact is becoming ever more important. This form of investment aims to deliver financial return in combination with positive social and environmental impact. But how exactly does social impact investing work, and is it even possible to achieve corporate profitability or returns for investors and a positive social impact at the same time? We explore these questions in this blog post.

Shareholder vs. Stakeholder

There has long been a debate about whether a company should prioritise the interests of its shareholders or those of other stakeholders, such as its employees, suppliers, etc. Two household names in economics also disagree on this issue: Milton Friedman argued strongly in favour of representing the interests of shareholders, whereas Joseph Stieglitz focuses on “responsible corporate stewardship”, i.e. the social role of the company. We will not find the solution to this debate in this blog post – the truth probably lies somewhere in between the two views. The quarterly hunt for better sales and earnings figures does not cover the entire role of companies; at the same time, it is not the sole responsibility of these companies to solve the social challenges facing the world either.

Economic efficiency & responsibility

In Erste Asset Management’s opinion, economic success and social responsibility are not mutually exclusive, but rather tasks that can complement each other. We see sustainable growth potential in solutions in the healthcare sector, education, and social infrastructure. It is not just about the products or services that companies produce; we will also analyse further below why it can be beneficial to take a look inside a company.

We therefore see a multitude of reasons why companies that address social issues or are socially committed can benefit in the long term. In the ERSTE FAIR INVEST equity fund, we attempt to reflect this in three different thematic blocks. We invest in companies that are pioneers in one or more of these thematic areas from a social perspective. Here, it is important for the investments in ERSTE FAIR INVEST to have an indirect social impact. We invest in companies that have a direct social impact through their products, services, or the way they work. We measure this positive impact, i.e. the social impact of the companies in the fund, annually and publish it transparently on our website. Please note that investments have advantages and risks.

So how are the thematic areas of our social impact equity fund structured, and why do we focus on these specific topics?

🚴‍♀️ Health(care) & wellness

A record number of runners took part in the recent 42nd Vienna City Marathon. About 38,000 people took on either the marathon, half marathon, or one of the relay distances. Most of them were wearing a sports watch or a smartwatch on their wrist. These are not only worn for sport (as in my case), but also to track activity during the day and even at night.

The trend towards a healthier lifestyle is definitely not new, but it is still very much present. In the context of the healthcare & wellness theme, we can identify companies that may benefit from such trends. However, this is not just about the physical health achieved through running, but also about topics such as

• healthy nutrition (vitamin balance, probiotics, etc.)
• physical safety (e.g. safety systems in cars such as seat belts and airbags)
• pharmaceuticals (medicines and vaccinations) and
• the mental well-being of people who, for example, have a pet as a member of their family.

Case in point: the American company Gilead Sciences, a pharmaceutical company that specialises in diseases such as HIV and hepatitis, as well as drugs and vaccines for these diseases. Since developing countries are particularly affected by these diseases and people in some regions have limited access to medical products, Gilead Sciences provides support by often distributing vaccines at cost price. However, this is only possible because its other business is highly profitable. Remember the question above about the compatibility of economic success and social impact? There you are.

👫 Society

Another very broad term – what do we mean by it? We are referring to companies whose products and services directly benefit people or society. Specifically, we focus on the areas of education, financial inclusion, and social infrastructure. These three areas have one thing in common above all else: they reduce inequality.

Let’s take two examples to illustrate this: access to high-quality, affordable education, or even just a language course, can be the gateway to a successful future for many people. Microloans primarily help people in developing countries to set up their own income-generating activities.

Social infrastructure is also an enormously important area for society, as it affects people on a daily basis. This area also has the potential to benefit from the recently approved German infrastructure package. Companies such as Siemens, Alstom, and Knorr-Bremse are examples of this scope of themes.

💼 Work

The topic of work is less about the products and services of the companies themselves and more about the employees who, by definition, make up an organisation. Does the company in question have a strong culture with which employees can identify? What about training opportunities or career prospects? What does the company do to attract and retain well-trained staff?

Questions like these are crucial in determining whether employees are happy with the organisation. We strongly believe that companies with satisfied employees are more efficient and therefore have a competitive advantage. In addition, employee turnover decreases, which has a positive effect on the company’s costs.

Other aspects we focus on include indicators such as the gender pay gap and the number of women in management positions. At the German consumer goods manufacturer Beiersdorf (owner of well-known brands such as Nivea, Eucerin, Labello, etc.), for example, 50% of all global management positions are held by women. The gender pay gap is also very low and is set to be completely closed by 2026.

A glance into the future: can Artificial Intelligence also provide a social contribution?

Artificial Intelligence (AI) is on everyone’s lips, and its applications are constantly growing. However, a chatbot or image generator does not really offer any social benefits. That being said, we believe there are some relevant areas where AI can make a positive contribution. If we look at the topics we have already talked about, such as health(care), we see enormous potential in preventive medicine, for example in the form of ever-improving genetic testing. AI-supported imaging can and will also play a very important role in the detection of diseases in the future.

We can also see great potential in the field of education, where some companies are already making great strides. One example in this context is individual, personalised learning. AI can figure out where a student is struggling and whether they just need more time or more input. Another example is the language learning app Duolingo, which now offers an AI-powered learning experience in conversation format with its latest subscription (Duolingo Max).

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Do good and talk about it!

Investments in socially sustainable companies are not the only way to generate benefits. Social initiatives and philanthropy are equally important and essential pillars for the positive development of our society, and they should also be given greater prominence.

As part of ERSTE FAIR INVEST, we have therefore been cooperating with the Red Cross since 2023. With our contribution, we support the “Lernhäuser” (learning houses) initiative of the Aus-Liebe-zum-Menschen-Stiftung (For the Love of People Foundation). In twelve learning centres across Austria, children and young people are supported with individual learning assistance and leisure activities to help them overcome educational disadvantages. It is initiatives like these that pave the way for a socially sustainable and fairer society. You can find out more about our cooperation with the Red Cross on our website.

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Conclusion

Social impact investing highlights that economic success and social responsibility can go hand in hand. Companies that address social and environmental challenges not only bring about positive change but also open up sustainable growth opportunities. The ERSTE FAIR INVEST equity fund combines precisely these goals: it invests in pioneering companies that achieve a measurable social impact through their products, services or working practices – whether in the areas of health(care), society or fair working conditions.

 

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