Impact investing refers to investments “made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return”.
Impact investing occurs across asset classes; for example, private equity/venture capital, debt, and fixed income.
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. They can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals.
The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
Characteristics of impact investing
The practice of impact investing is further defined by the following characteristics.
An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing.
INVESTMENT WITH RETURN EXPECTATIONS
Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.
RANGE OF RETURN EXPECTATIONS AND ASSET CLASSES
Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.
A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.
Investors’ approaches to impact measurement will vary based on their objectives and capacities, and the choice of what to measure usually reflects investor goals and, consequently, investor intention. In general, components of impact measurement best practices for impact investing include:
- Establishing and stating social and environmental objectives to relevant stakeholders
- Setting performance metrics/targets related to these objectives using standardized metrics wherever possible
- Monitoring and managing the performance of investees against these targets
- Reporting on social and environmental performance to relevant stakeholders
Note: On April 3, 2019, the GIIN published the Core Characteristics of Impact Investing, which complements this definition and aims to provide even further clarity about how to approach impact investing.
Why impact investing?
Impact investing challenges the long-held view that social and environmental issues should be addressed only by philanthropic donations and that market investments should focus exclusively on achieving financial returns.
The impact investing market offers diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns.
Many types of investors are entering the growing impact investing market. Here are a few common investor motivations:
- Banks, pension funds, financial advisors, and wealth managers can PROVIDE CLIENT INVESTMENT OPPORTUNITIES to both individuals and institutions with an interest in general or specific social and/or environmental causes.
- Institutional and family foundations can LEVERAGE SIGNIFICANTLY GREATER ASSETS to advance their core social and/or environmental goals while maintaining or growing their overall endowment.
- Government investors and development finance institutions can PROVIDE PROOF OF FINANCIAL VIABILITY for private-sector investors while targeting specific social and environmental goals.
ABOUT THE AUTHOR
Alex has over 15 years of experience in founding and running businesses, the most recent company having raised over £50m in funding for businesses based across the globe. He has a thorough knowledge of business funding options and can draw on many successful consultancy engagements to bring impetus to venturing. Alex has now set his focus on working with entrepreneurial teams looking to make a positive impact on the climate crisis and the broader UN Sustainable Development Goals.