Impact investing refers to
investments
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
"made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". At its core, impact investing is about an alignment of an investor's beliefs and values with the allocation of capital to address social and/or environmental issues.
Impact investors actively seek to place capital in businesses,
nonprofits
A nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...
, and funds in industries such as
renewable energy
Renewable energy is energy that is collected from renewable resources that are naturally replenished on a human timescale. It includes sources such as sunlight, wind, the movement of water, and geothermal heat. Although most renewable energy ...
, housing, healthcare, education,
microfinance
Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings ...
, and
sustainable agriculture
Sustainable agriculture is farming in sustainable ways meeting society's present food and textile needs, without compromising the ability for current or future generations to meet their needs. It can be based on an understanding of ecosystem ser ...
. Institutional investors, notably
North American
North America is a continent in the Northern Hemisphere and almost entirely within the Western Hemisphere. It is bordered to the north by the Arctic Ocean, to the east by the Atlantic Ocean, to the southeast by South America and the Ca ...
and
Europe
Europe is a large peninsula conventionally considered a continent in its own right because of its great physical size and the weight of its history and traditions. Europe is also considered a Continent#Subcontinents, subcontinent of Eurasia ...
an
development finance institution
A development financial institution (DFI), also known as a development bank or development finance company (DFC), is a financial institution that provides risk capital for economic development projects on a non-commercial basis.
, total commitme ...
s,
pension funds and
endowments have played a leading role in the development of impact investing.
Under
Pope Francis
Pope Francis ( la, Franciscus; it, Francesco; es, link=, Francisco; born Jorge Mario Bergoglio, 17 December 1936) is the head of the Catholic Church. He has been the bishop of Rome and sovereign of the Vatican City State since 13 March 2013. ...
, the
Catholic Church
The Catholic Church, also known as the Roman Catholic Church, is the largest Christian church, with 1.3 billion baptized Catholics worldwide . It is among the world's oldest and largest international institutions, and has played a ...
has seen an increased interest in impact investing.
Impact investing occurs across
asset classes
In finance, an asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having ...
; for example,
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...
/
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which ha ...
, debt, and fixed income. Impact investments can be made in either emerging or developed markets, and depending on the goals of the investors, can "target a range of returns from below-market to above-market rates".
Development
Historically, regulation—and to a lesser extent,
philanthropy
Philanthropy is a form of altruism that consists of "private initiatives, for the Public good (economics), public good, focusing on quality of life". Philanthropy contrasts with business initiatives, which are private initiatives for private goo ...
—was an attempt to minimize the negative social consequences (
unintended consequences
In the social sciences, unintended consequences (sometimes unanticipated consequences or unforeseen consequences) are outcomes of a purposeful action that are not intended or foreseen. The term was popularised in the twentieth century by Ameri ...
,
externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
) of business activities. However, a
history
History (derived ) is the systematic study and the documentation of the human activity. The time period of event before the History of writing#Inventions of writing, invention of writing systems is considered prehistory. "History" is an umbr ...
of individual investors using
socially responsible investing
Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social ...
to express their values exists, and such investing behavior is usually defined by the avoidance of investments in specific companies or activities with negative effects.
Simultaneously, approaches such as pollution prevention,
corporate social responsibility
Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethicall ...
, and
triple bottom line
The triple bottom line (or otherwise noted as TBL or 3BL) is an accounting framework with three parts: social, environmental (or ecological) and economic. Some organizations have adopted the TBL framework to evaluate their performance in a broade ...
began as measurements of non-financial effects, both inside and outside of corporations. In 2000, Baruch Lev of the
NYU
New York University (NYU) is a private research university in New York City. Chartered in 1831 by the New York State Legislature, NYU was founded by a group of New Yorkers led by then-Secretary of the Treasury Albert Gallatin.
In 1832, the ...
's
Stern School of Business
The New York University Leonard N. Stern School of Business (commonly referred to as NYU Stern, The Stern School of Business, or simply Stern) is the business school of New York University, a private research university based in New York City. I ...
collated thinking about
intangible asset
An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. This is in contrast to physical assets (machinery, buildings, etc.) and finan ...
s in a book of the same name, which furthered thinking about the non-financial effects of corporate production.
Finally, around 2007, the term "impact investing" emerged.
A commitment to measuring social and environmental performance, with the same rigor as that applied to financial performance, is a critical component of impact investing.
[Is 'Impact Investing' Just Bad Economics?](_blank)
''Forbes'', April 22, 2014
Current industry
The number of funds engaged in impact investing grew quickly over a five-year period and a 2009 report from research firm the
Monitor Group
Monitor Deloitte is the multinational strategy consulting practice of Deloitte Consulting. Monitor Deloitte specializes in providing strategy consultation services to the senior management of major organizations and governments. It helps its clien ...
estimated that the impact investing industry could grow from around US$50 billion in assets to $500 billion in assets within the subsequent decade.
Such capital may be deployed using a range of investment instruments, including equity, debt, real assets, loan guarantees, and others.
The growth of impact investing is partly attributed to the criticism of traditional forms of philanthropy and
international development
International development or global development is a broad concept denoting the idea that societies and countries have differing levels of economic or human development on an international scale. It is the basis for international classifications ...
, which have been characterized as unsustainable and driven by the goals—or whims—of the corresponding donors.
Currently, impact investing is still only a small market when compared to the global equity market, estimated at US$61 trillion (market capitalization of domestic listed companies) by the World Bank in 2015.
Impact investors managed US$114 billion in impact investing assets, a figure that serves as a best-available "floor" for the size of the impact investing market, according to GIIN's 2017 ''Annual Impact Investor Survey''. The largest sectors by asset allocation were microfinance, energy, housing, and financial services.
Many
development finance institution
A development financial institution (DFI), also known as a development bank or development finance company (DFC), is a financial institution that provides risk capital for economic development projects on a non-commercial basis.
, total commitme ...
s, such as the British
Commonwealth Development Corporation
British International Investment, (formerly CDC Group plc, Commonwealth Development Corporation, and Colonial Development Corporation) is the development finance institution of the UK government. The Foreign, Commonwealth and Development Office ...
or Norwegian
Norfund
Norfund is a development finance institution established by the Norwegian Storting (parliament) in 1997 and owned by the Norwegian Ministry of Foreign Affairs. The fund receives its investment capital from the state budget. Its head office is locat ...
, can also be considered impact investors, because they allocate a portion of their portfolio to investments that deliver financial as well as social or environmental benefits.
Impact investing is distinguished from
crowdfunding
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by crow ...
sites, such as
Indiegogo or
Kickstarter
Kickstarter is an American public benefit corporation based in Brooklyn, New York, that maintains a global crowdfunding platform focused on creativity. The company's stated mission is to "help bring creative projects to life". As of July 2021, ...
, because impact investments are typically debt or equity investments over US$1,000—with longer-than-traditional
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which ha ...
payment times—and an "exit strategy" (traditionally an
initial public offering (IPO) or buyout in the for-profit
startup sector) may be non-existent. Although some social enterprises are nonprofits, impact investing typically involves for-profit, social- or environmental-mission-driven businesses.
Organizations receiving impact investment capital may be set up legally as a for-profit, not-for profit,
Benefit corporation
In the United States, a benefit corporation (or in several jurisdictions including Delaware, a public-benefit corporation or PBC) is a type of for-profit corporate entity, authorized by 35 U.S. states and the District of Columbia, that includ ...
,
Low-profit limited liability company
A low-profit limited liability company (L3C) is a legal form of business entity in the United States. Commonly referred to as a hybrid structure, it has characteristics of both for-profit and non-profit entities. L3Cs were created to comply with t ...
(L3C),
Community interest company
A community interest company (CIC, colloquially pronounced "kick") is a type of company introduced by the United Kingdom government in 2005 under the Companies (Audit, Investigations and Community Enterprise) Act 2004, designed for social ente ...
, or other designations that may vary by country. In much of Europe, these are known as "
social enterprise
A social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social and environmental well-being. This may include maximizing social impact alongside profits for co-owners.
Social enterprises ca ...
s".
The main activists in this market have been
Impax Asset Management Group
Impax Asset Management Group plc is a specialist asset manager based in London, England.
History
The business was founded in 1998 to invest in companies whose work might reduce resource scarcity, with support from the International Finance Corpo ...
, which is a UK-based specialist in environmental impact investing, Sarasin and Partners, which has a history of pressing investee companies on sustainability issues, and
Triodos Investment Management, which is a
Netherlands
)
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, image_map =
, map_caption =
, subdivision_type = Sovereign state
, subdivision_name = Kingdom of the Netherlands
, established_title = Before independence
, established_date = Spanish Netherl ...
-based manager which focuses on sustainability issues.
India is emerging as a major geography for impact investors according to consulting firm, McKinsey, with over $1.1 billion already invested as of 2016.
Institutional impact investing
Institutional investors
Impact investments occur across asset classes and investment amounts. Among the best-known mechanism is private equity or venture capital. "
Social venture capital Social venture capital is a form of investment funding that is usually funded by a group of social venture capitalists or an impact investor to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve an outsi ...
", or "patient capital", impact investments are structured similarly to those in the rest of the venture capital community. Investors may take an active role mentoring or leading the growth of the company,
similar to the way a venture capital firm assists in the growth of an early-stage company. Hedge funds and private equity funds may also pursue impact investing strategies.
[Lemke, Lins, Hoenig and Rube, ''Hedge Funds and Other Private Funds'', §6:43 (Thomson West, 2013)]
Impact investment "accelerators" also exist for seed- and growth-stage social enterprises. Similar to seed-stage accelerators for traditional startups, impact investment accelerators provide smaller amounts of capital than Series A financings or larger impact investment deals.
Most "impact investment accelerators" are nonprofits, raising grants from donors to pay for business development services; however, commercially orientated accelerators providing investment readiness and capital-raising advisory services are emerging.
Large corporations are also emerging as powerful mechanisms for impact investing. Companies that seek to create shared value through developing new products/services, or positively impacting their operations, are beginning to employ impact investments through their value chain, particularly their supply chain.
Impact investing can help organizations become self-sufficient by enabling them to carry out their projects and initiatives without having to rely heavily on donations and state subsidies.
There has been a growing interest in impact investing from faith-based investors, as they seek to align their investments with their core beliefs.
Increased supranational and pension cooperation
Governments and national and international public institutions including
development finance institution
A development financial institution (DFI), also known as a development bank or development finance company (DFC), is a financial institution that provides risk capital for economic development projects on a non-commercial basis.
, total commitme ...
s have sought to leverage their impact-oriented policies by encouraging
pension funds and other large asset owners to co-invest with them in impact-informed assets and projects, notably in the
Global South.
World Pensions Council
The World Pensions & Investments Forum is a research and policy oriented conference organised by the World Pensions Council (WPC), also known as the International Association of Pension Funds (IAPF), in partnership with regional and supranational ...
and other US and European experts have welcome this course of action, insisting nonetheless that:
Governments and international institutions need to do more if they truly seek to 'unlock' private sector capital in a meaningful way. They have to ask themselves the following questions: what are the concrete legal, regulatory, financial and fiduciary
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...
concerns facing pension fund board members? How can we improve emerging industry standards for impact measurement and help pension trustees steer more long-term capital towards valuable economic endeavors at home and abroad, while, simultaneously, ensuring fair risk-adjusted returns for future pensioners?
Mission investing by foundations
Mission investments are investments made by foundations and other mission-based organizations to further their philanthropic goals, either with a portion or with the entirety of their
endowment. They include any type of investment that is intended and designed to generate both a measurable social or environmental benefit and a financial return. For example, after the
Heron Foundation's internal audit of its investments in 2011 uncovered an investment in a private prison that was directly contrary to the foundation's mission, the foundation developed and then began to advocate for a four-part
ethical framework to endowment investments conceptualized as Human Capital, Natural Capital, Civic Capital, and Financial Capital.
Foundations that make investments aligned with related philanthropic work include the
Bill & Melinda Gates Foundation
The Bill & Melinda Gates Foundation (BMGF), a merging of the William H. Gates Foundation and the Gates Learning Foundation, is an American private foundation founded by Bill Gates and Melinda French Gates. Based in Seattle, Washington, it was l ...
,
Soros Economic Development Fund, and
Ford Foundation
The Ford Foundation is an American private foundation with the stated goal of advancing human welfare. Created in 1936 by Edsel Ford and his father Henry Ford, it was originally funded by a US$25,000 gift from Edsel Ford. By 1947, after the death ...
.
Program-related investments (PRIs)
Program-related investments (PRIs) are investments, usually by foundations, into below-market rate or concessionary investments that are primarily made to achieve charitable or "programmatic" objectives rather than financial objectives. This category includes recoverable grants, below-market-rate loans, R&D or seed stage equity investments (stock), loan guarantees and volume guarantees. For private foundations, PRIs count towards the required 5 percent annual payout.
Mission-related investments (MRIs)
Mission-related investments (MRIs) are investments, generally made from endowments, into mission-driven organizations that are expected to generate market-rate financial returns comparable to an ordinary investment of a similar type and risk profile. MRIs are designed to have both a positive social impact and contribute to the endowment's long-term financial stability and growth. Examples of MRIs include loans to mission-aligned non-profit organizations (e.g., charter schools, hospitals or research centers) that are expected to pay back loans with interest, as well as investments in for-profit social impact companies, social impact funds, socially responsible fixed income (bond) funds, impact-oriented private equity funds and public equity portfolios (stocks).
Impact investing by individuals
Impact investing historically took place through mechanisms aimed at institutional investors. However, there are ways for individuals to participate in providing early stage or growth funding to such ventures.
Exchange-traded funds
Exchange-traded fund
An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the ...
s like the SPDR Gender Diversity ETF from
State Street are publicly traded and hence available to anyone with a stock brokerage account.
MSCI
MSCI Inc. is an American finance company headquartered in New York City. MSCI is a global provider of equity, fixed income, real estate indexes, multi-asset portfolio analysis tools, ESG and climate products. It operates the MSCI World, MSCI ...
offers 11 environmental, social and governance index ETFs, including popular low-carbon and sustainability indexes.
Syndicate or pooled investing
Groups of
angel investor
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or owners ...
s focused on impact, where individuals invest as a syndicate also exist. Examples include Investors' Circle in the US,
Clearly Social Angels in the United Kingdom
and the global investor network Toniic.
Digital microfinance platforms
Web-based investing platforms, which offer lower-cost investing services, also exist. As equity deals can be prohibitively expensive for small-scale transactions, microfinance loans, rather than equity investment, are prevalent in these platforms.
MyC4, founded in 2006, allowed retail investors to loan to small businesses in African countries via local intermediaries, though the service permanently closed in 2019.
Microplace was an early United States provider of such services which ceased taking on new loans in 2014, stating that its results "haven't scaled to the widespread social impact we aspire to achieve".
Impact investing in Asia
Impact Investing in Asia is a burgeoning sector with many funds currently in play. In South East Asia, from 2007 to 2017, US$904 million impact capital was deployed by Private Impact Investors (PIIs) and US$11.9 million was deployed by Development Finance Institutions (DFIs).
Private equity and venture capital
Impact investing organizations and funds also make equity
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
s like traditional
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...
and
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which ha ...
funds, but only investments with developmental impact.
According to
2021 studyby the
Wharton School of the University of Pennsylvania
The Wharton School of the University of Pennsylvania ( ; also known as Wharton Business School, the Wharton School, Penn Wharton, and Wharton) is the business school of the University of Pennsylvania, a Private university, private Ivy League rese ...
venture capital has been dominating the impact investment space.
Gender lens investing
Gender lens investing is a subsection of Impact Investing, and refers to investments which are "made into companies, organizations, and funds with the explicit intent to create a positive impact on gender". Investments which promote gender equity and address gender based issues can be made by investing in gender led enterprises, enterprises which promote gender equality through hiring, women in positions of authority, or in their supply chain, as well as supporting services which support, empower and develop capacity of women.
Gender lens investing was created in response to the difficulty which woman face in accessing capital, as women globally have less access and higher barriers to obtaining capital.
Female entrepreneurs have routinely struggled to attract capital from male investors. In 2019 ''Fortune'' magazine reported that just 2.2% of all venture capital went to female founders. Taken together, all female founders raised less in capital than one e-cigarette manufacturer. Some have gone to great lengths to avoid experiencing gender discrimination. In 2017 the ''Telegraph'' reported on the founders of Witchsy who created an imaginary third male founder in order to converse with male investors.
Gender lens investing is growing rapidly. More than 100 funds are open to private investors. In 2018 the number of gender lens assets under management grow by 40% according to analysis by Veris Wealth Partners.
Demand is rising with major banks offering gender lens bonds including NAG, Goldman Sachs, Merrill Lynch and many others.
See also
*
Double bottom line Double bottom line (abbreviated as DBL or 2BL) seeks to extend the conventional bottom line, which measures fiscal performance—financial Profit (accounting), profit or loss—by adding a ''second'' bottom line to measure a for-profit busin ...
*
Financial inclusion
Financial inclusion is defined as the availability and equality of opportunities to access financial services. It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and service ...
*
Social finance Social finance is a category of financial services which aims to leverage private capital to address challenges in areas of social and environmental need. Having gained popularity in the aftermath of the 2008 Global Financial Crisis, it is notable f ...
*
Social return on investment
Social return on investment (SROI) is a principles-based method for measuring extra-financial value (such as environmental or social value not currently reflected or involved in conventional financial accounts). It can be used by any entity to e ...
*
Socially responsible investing
Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social ...
References
{{Investment-management
Social finance
Investment
Corporate social responsibility
Economy and the environment