The Global Impact Investing Network (GIIN) defines impact investments as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” They can be characterized as investments that are made with intention, expectation of return, and accountability.

The four core characteristics of impact investments are:

  • Intentionality – the intention to make positive social or environmental change with your investment.
  • Investing with return expectations – the expectation that this venture will generate ROI, or at least a return of capital funds.
  • Range of return expectations and asset classes – investors target returns that range from concessionary to risk-adjusted market rate; investments can be made across asset classes, e.g. cash equivalents, fixed income, venture capital and private equity.
  • Impact measurement – the investor is responsible for monitoring the social and environmental impact of their investments and reporting on their progress, ensuring transparency and contributing to the growth of the field.

In this article, we’re going to answer all your questions about impact investing to help you decide whether this type of investment is a good fit for you.

Why is impact investing important?

Impact investing can help bring about positive social and environmental change with a greater diversity of assets than traditional philanthropy.

That’s not to say philanthropy is obsolete, however. Charities and investors will make the biggest impact by working together. For starters, impact investing is a smart and sustainable use of donor money as the returns can be put back into the fund over and over again and generate more cash. It also gives donors the freedom and flexibility to explore new ways of increasing their returns while also making a difference.

Impact investing can be used to further specific causes or fund specific initiatives. For example, there’s been a concerted effort to align impact investing with the UN’s Sustainable Development Goals (SDGs), which are geared towards creating “a better and more sustainable future for all” by the year 2030. The GIIN Annual Survey (2017) found that 60% of investors were looking into monitoring the outcomes of their investments with regard to the SDGs a year after they were announced.

But combining philanthropy with impact investment can also help advance projects that don’t look like a good idea to traditional investors because they’re too high risk or don’t have a definite timeline. Here, donors can provide risk or early capital to causes that have the potential to drive change.

Over the last century, philanthropic organizations have been working to develop efficient impact measurement systems. Impact measurement is probably the biggest challenge facing impact investors today, so, by coordinating their efforts, the monitoring and reporting of social/environmental change and financial returns can be made more transparent.

What are the different types of impact investments?

1. Environmental, social and governance (ESGs)

Environmental, social and governance criteria are used to evaluate the material impact of an investment. Rather than looking at the potential financial returns of an investment in isolation, looking at the following ESG factors can help investors weigh up possible opportunities vs. risk: 

  • Environmental – a company’s energy use, waste, carbon footprint, treatment of animals. 
  • Social – a company’s mission and values (plus supplier values), commitment to community (charitable donations, volunteer days), staff wellbeing, health and safety regulations. 
  • Governance – a company’s business practices, e.g. accounting transparency, stakeholder involvement, conflicts of interest, legality of operations.

However, while these factors are taken into account, financial performance is still the main objective of ESG investments.

2. Socially responsible investing (SRI)

Socially responsible investing also uses ESG analysis – but to screen potential investments, rather than to value them. SRI investors actively select/discount potential investment opportunities based on ethical considerations determined by, for example, the investor’s religious, personal, or political beliefs. ESG investors, on the other hand, look at all the data and make their decision based on projected ROI.

What are the pros and cons of impact investing?

Pros

  • Return on Investment (ROI) – Technically speaking, impact investors can keep investing the same money in different socially or environmentally conscious projects. Even a basic return has more philanthropic potential than a standard donation, because that money can only be used once.
  • More money for change – US foundations have a legal obligation to disperse 5% of their assets every year to meet philanthropic goals, but the vast majority of their assets are normally focused on generating market returns. When it comes to impact investing, more of the funds available can be allocated to social/environmental causes.
  • Transparency – Ethical investments remove the conflict of interest for donors who might otherwise have stakes in companies with values opposite to their philanthropic goals.

Cons

  • High risk – Of course, there are risks associated with any type of investment, but the nature of the opportunities in this field increases the potential for loss for impact investors. For example, social enterprises in underdeveloped countries may face the additional challenge of having to build the infrastructure they need to deliver their service before getting started on the project itself. The lack of foundation and extended timeframe may make the initiative unsustainable in the long run.
  • Lack of expertise – Impact investing is a relatively new field of investment (the phrase itself wasn’t coined until 2007), so there is still a significant lack of shared understanding between financial and philanthropic advisors. Although a new class of advisors with experience of both philanthropy and investment is beginning to form, building a team with enough knowledge and experience remains a challenge.
  • Impact measurement – Thanks to collaboration between charitable organizations and investment funds, measuring the impact of social/environmental investments has become easier. However, industry leaders are still searching for the most effective way to establish a standard for impact measurement across the board.

Who is making impact investments?

Impact investment appeals to a wide range of individual investors, as well as a variety of institutions including:

  • Hedge funds
  • Development finance institutions
  • Diversified financial institutions/banks
  • Private foundations
  • Pension funds
  • Insurance companies
  • Family offices
  • NGOs
  • Religious institutions

Is impact investing the right investment for you?

Whether impact investing – or any other type of investment, for that matter – is the right fit for you will depend on your values, your financial goals, and your understanding of the different impact investment opportunities available to you. Lack of experience/expertise is one of the biggest challenges facing impact investors right now, but, if you have an interest in social enterprise and understand the implications (investment, philanthropy, law, etc.), you could make a huge difference – plus, potentially, a big return on your initial investment.

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