Summary: In this article, we will discuss social impact investing, its characteristics, who invests, how they perform financially and what to expect for the future. Topics also include why investors choose this type of investing and examples of impact investments around the world.
What is social impact investing? I’ll be honest, I’ve heard the term “impact investing” but have never done much digging on the topic. After a lot of digging around (aka research), this Millennial is proud to share everything I’ve learned.
This type of investing is cool! Not only can impact investing produce financial returns, it also pulls on those heartstrings tied to our social and/or environmental values. Socially Responsible Investing (SRI) is a growing trend, with a thriving market and exciting future.
What is Impact Investing?
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
The impact investing market is growing, addressing sectors such as renewable energy, conservation, sustainable agriculture, and micro-finance. Along with accessible and affordable basic services including healthcare, housing, and education.
Characteristics of Impact Investing
In 2019, the Global Impact Investing Network (GIIN), a champion in the industry, came up with four core characteristics of impact investing.
“The Core Characteristics of Impact Investing define the baseline expectations of what it means to practice impact investing,” explains GIIN. “…Core Characteristics serve as a reference point for investors to identify practical actions they can take to scale their practice with integrity.”
These four characteristics help define credible impact investing:
- Intentionality. An investors 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.
- Impact Measurement. 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.
Why Impact Investing?
The most common motivator of investing has historically focused on one goal, to achieve financial returns. Impact investing challenges the notion that social and environmental issues are only funded and addressed by donations.
Because the impact investing market is growing, there are more and more opportunities for investors to put their money toward the social and environmental solutions, while also producing financial returns.
A few of the most common investor motivations, according to GIIN, include:
- 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.
Who is Making Impact Investments?
There is a diverse range of individuals and organizations that participate in impact investing projects.
- Fund Managers
- Development finance institutions
- Diversified financial institutions / banks
- Private foundations
- Pension funds and insurance companies
- Family Offices
- Individual investors
- Religious institutions
As you can see, impact investing can offer benefits both socially and financially to a number of different people and groups.
Do Impact Investments Perform Financially?
According to GIIN’s 2018 Annual Impact Investor Survey, impact investors have differing return expectations, with most pursuing competitive, market-rate returns. However, some may intentionally invest to get below-market returns, based on their strategy and specific objectives.
Results of the Impact Investor Survey show a break down of targeted financial returns. In other words, the rate of return the investment is seeking. 64 percent go for a risk-adjusted, market rate return. With 20 percent below market, but closer to market rate. And 16 percent below market and closer to capital preservation.
Participants of the survey reported that the performance of their portfolio met or exceeded expectations, both socially, environmentally and financially. This was true across new markets, developed markets, and the market as a whole.
To see a comprehensive report on the financial returns of impact investments, check out GIIN’s report, Evidence on the Financial Performance of Impact Investments. The report looks at the financial performance of three asset classes: private equity, private debt, and real assets.
3 Examples of Impact Investing Around the World
As mentioned above, there is a wide offering of impact investments that, not only produce positive social and/or environmental impacts, but produce financial returns as well. Here are three examples of impact investing:
1- Investor: Gray Ghost DOEN Social Ventures Coöperatief. Investee: Beam Money Private Limited
Gray Ghost was established to produce capital to come up with technologies that serve underserved populations. Beam is an Indian mobile payment company that allows people to make electronic payments without a bank account.
Targeted Impact: Increase access to financial transaction services for the unbanked. Find their complete profile here.
2- Investor: Calvert Foundation. Investee: Craft3
The Calvert Foundations goal is investing to increase capital into disadvantaged communities. Craft3 is a nonprofit, non-bank community development financial institution hoping to build economic, ecological, and family resilience throughout the Pacific Northwest of the United States.
Target Impact: Increase economic opportunity in disadvantaged communities. Find their complete profile here.
3- Investor: FMO. Investee: Clean Energy
FMO is a Dutch development bank investing to improve lives and livelihoods around the world, including food, water, and energy. Clean Energy or CE is a “special purpose vehicle” exclusively to fund the construction of Mongolia’s first wind farm.
Target Impact: Increase renewable energy use and access in emerging markets in Asia. Find their complete profile here.
If you are interested in exploring more impact investment profiles across different sectors, visit here.
How Big is the Impact Investing Market?
“The amount and diversity of capital for impact investing has increased dramatically in the past ten years, with the current impact investing market estimated to be $502 billion,” according to GIIN’s report.
Because impact investing is still a relatively new term, more money is still needed to advance social and environmental solutions throughout the world.
What is the Social Impact?
Between 60 million to 80 million people in India have benefitted from impact investments. To put into perspective, that’s equivalent to the entire population of France. With the number of social impact institutions and investors rapidly growing, we will also see their impact not just on large populations, but at-risk people among smaller populations.
What to Expect for the Future of Social Impact Investing
Millennials are changing the way people invest. As they gain more equity in various markets, a study showed that 90 percent of Millennials would switch brands to one that is associated with a cause. As such, we should expect to see a huge trend toward impact investing, based on the social and environmental values of Millennials.
My biggest takeaway after writing this article is that investing doesn’t have to be for a singular purpose or goal. Social impact investing challenges the idea that investments are only about money and returns. Invest for a purpose and feel good about, not only about a monetary return, but giving back to the world around you.