How it Differs
Impact Investing is an emerging industry. It’s a positive innovation in finance in a very critical point of the history of investment activity. Our new era needs a new type of investing and the idea of using profit-seeking investment to generate social and environmental good is moving to the core of mainstream financial institutions. In the arena of investing for impact, a variety of terms have been coined to articulate different ways in which financial capital can be harnessed to achieve a positive social or environmental impact. While impact investing overlaps with many of these other practices, the term refers to a specific type of activity.
Corporate Social Responsibility (CSR)
Several terms have emerged that articulate the role of corporations in addressing social and environmental problems. Corporate Social Responsibility (CSR) is defined as the integration of business operations and values, where the interests of all stakeholders, including investors, customers, employees, the community, and the environment are reflected in the company’s policies and actions. Special attention is given to corporate practices as they relate to environmental, social, and governance (ESG) performance. These concepts include financial investments as well as other activities focused on shifting the behavior of corporations. Impact investing only includes those activities focused on the deployment of capital with the intention of having a positive social or environmental impact.
Social investing is a term with many uses, although it generally refers to investing that considers social and environmental issues. Social investing includes investments made with the intention of having a positive impact, investments that exclude “harmful” activities and investments that are driven by investors’ values and don’t necessarily correspond to having a positive social or environmental impact. Impact investing is a subset of social investing; it refers only to the social investing that actively seeks to have a positive impact.
Philanthropy has traditionally focused on gifts made by individuals and organizations to benefit society and the environment. Impact investing, with its requirement of a minimum return of principal, is distinct from grantmaking activities. Impact investing can however be an important vehicle for philanthropists to realize their objectives. Similarly, nonprofit organizations can act both as impact investors and as recipients of impact investments to enhance their impact.
Mission and Program related Investments (MRI)
MRI is a term coined recently to describe market rate investment by private foundation endowments that use the tools of social investing, sometimes including shareholder advocacy and positive and negative screening. PRI is below market rate investment by foundations; deeply focused on impact and counting toward endowment payout requirements for foundations. Almost any PRI would be considered a form of impact investing.
Bottom of the Pyramid (BoP)
BoP refers to a broad set of business activities focused on the 4 billion people living on less that $2 per day. Different schools of thought within the BoP community advocate that the poor should be seen as potential consumers, producers, partners, and/or innovators. Impact investing overlaps with some BoP activities to the extent that they involve investments with the intention of having a social or environmental impact for low-income communities. But impact investing does not assume that any investment – in a business selling products to poor people – inherently creates social impact.
Creation of Economic Value in Poor Countries from Private Sector
Increasing private sector activity creates economic value, but it is done with a variety of intentions. Impact investing only includes those investments made with the explicit intention of having a positive social or environmental impact, such as job creation for low-income people. The fact that an investment is made in a poor country is not sufficient to qualify it as an impact investment.
Sustainable Business Opportunities
Sustainable business opportunities refer to actions that are profitable and benefit low-income communities. These companies may also be considered as social-purpose businesses or social enterprises. Examples include direct employment of the poor, often through targeted development of supply chains and the provision of affordable goods and services to them. This concept has significant overlap with creative capitalism, CSR and BoP. Impact investing includes the subset of Sustainable Business Opportunities that involve the deployment of capital with the intention of having a positive social or environmental impact. The major investment criteria of Impact Investors toward their focus on what they believe are the most significant drivers of overall well-being and quality of life is: alignment, impact, potential for scale, leadership and innovation. Financial performance data alone is insufficient to fully capture the impact of an investor’s work. That is why an investor should be continuously committed to identify, understand, monitor, track and ultimately enhance the societal impact of his/her investments and approach of new ways of measuring social impact such as: location in an underserved area, fostering entrepreneurs, creating jobs, creating economic dynamism, environment, education & skills, health & well-being.
About the author:
Thanos Niforos graduated from EU in 1994. He is a licensed investment advisor and serves as a Loan & Political Risk Insurance Originator for the Enterprise Development Network program of OPIC, the U.S. Government’s Development Finance Institution, Signatory of the UN Principles for Responsible Investment. He also collaborates with the UN Development Business for consulting, contracting and exporting opportunities worldwide. He is a frequent speaker and contributor at investment conferences and international media, and has also published several articles for contemporary macroeconomic and investment themes.