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What Is Impact Investing?

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Last editedMay 20213 min read

Traditionally, the only real primary goal of an investor was to create financial gains. Investing has long been viewed as a money-making business tactic, for businesses and investors alike, while philanthropic contributions from wealthy investors and organizations were seen mainly through charitable donations.

In recent years, perspectives have shifted and it has become clear that impact investing not only has environmental and social benefits, but presents just as much, if not more opportunity for financial gain than traditional business investments. 

Impact investing definition

The Global Impact Investors Network (GIIN) defines impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.

Impact investing means making investments where the goal is not only profit, but also positive social or environmental change. Similar concepts include ethical investment, sustainable investment, and conscious capitalism.

Impact investments may go towards issues like climate change, poverty, education, equality, or otherwise. When you make an impact investment, you’re investing in a business or project that actively looks to solve social and environmental issues.

Why is impact investing important?

Many believe that the only way to solve global issues and crises is with the financial backing of impact investment. While individual activism and government intervention are both important, without the support of major businesses and financial institutions, substantial change simply isn’t possible.

Many have turned to the private sector seeking a more significant response to global issues. It’s safe to assume that we’d be able to solve a number of major issues a lot faster if more capital was spent on good, and if investors and businesses started to favor positive global change over personal profit.

Even outside of the investment world, business in general has rapidly evolved alongside a cultural shift towards stronger activism, sustainability, accountability, and corporate social responsibility.  These days, the success and reputation of a business rides not only on its bottom line, but on its ethical values and actions too. Philanthropy and equity have become driving factors in the success of a business.

Even Larry Fink, CEO of Blackrock—the world’s largest investment firm—has stated that, “To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”

Do impact investments generate good returns?

The ethical or social impact of a business often correlates with its financial performance. Many may have assumed that investing based not only on profit but on ethical factors too could yield unfavorable results, but in actuality, a large majority of impact investors report that investment performance meets or exceeds expectations both in terms of social and environmental impact and financial return.

Returns can span a number of asset classes, including venture capital, private equity, fixed income, and cash, among others.

Some impact investors strategically target below-market-rate returns, while many go for more competitive or market-beating returns. GIIN’s 2020 Annual Impact Investor Survey shows that 67% of impact investors target risk-adjusted market-rate returns.

 Who makes impact investments?

The most common impact investors include fund managers, NGOs, religious institutions, family offices, diversified banks, and private foundations. There are individual investors too, but institutional investors make up the majority of the impact investing market.

Among the most successful impact investing firms are the Vital Capital Fund, the Community Reinvestment Fund, BlackOrchard Finance S.A., and Triodos Investment Management.

The GIIN estimates that the current market size of impact investing is around $715 billion USD, as of June 2020.  

Types of impact investment

Impact investments can come in many different forms. An impact investor may choose to support an emerging market or an already-developed economy through their investment. There are several industries that present opportunities for impact investors, including energy, agriculture, and healthcare.

Environmental, Social, & Governance (ESG) is a criteria that impact investors can use to find the best opportunities. These factors can be measured alongside a financial analysis of a business to identify opportunities and risks. ESG analysis is used mainly to determine or estimate the financial performance of a business, while considering ethical factors.

Socially responsible investing (SRI) is a practice that can fall under the umbrella of impact investing, but the goals differ slightly. SRI refers to disregarding investment opportunities that may cause social or environmental harm – but doesn’t necessarily mean investing in businesses actively working towards positive change. For example, SRI might mean not investing in businesses with a large carbon footprint, while impact investing would be actively investing in renewable energy projects.

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