What is Impact Investing?

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Definition

What is Impact Investing?

Businesses involved in impact investing allocate assets towards goods and services that bring about positive social impact. Impact investing can create significant value for investors and society as a whole.

Key Characteristics of Impact Investing

  • Aims to Have a Positive Environmental or Social Impact
    Impact investing uses investments to help address social and environmental issues like climate change, hunger, poverty, homelessness, and the HIV/AIDS epidemic.
  • Delivers a Financial Return on Capital
    Impact investing is foremost a business activity and, therefore, expected to yield a financial return on capital or, at least a return of capital.
  • Spans a Broad Range of Sectors and Regions
    Impact investing is inclusive across asset classes, from cash equivalents and microfinance, to private equity and clean technology.
  • Measures Social/Environmental Impact Regularly
    The impact investor regularly assesses and reports the social and environmental performance of existing investments to ensure transparency and accountability, and inform potential investors.

Why Venture into Impact Investing?

Conventional wisdom suggests that philanthropic donations and state subsidies are the only solutions to environmental and social issues. The primary goal of business is to generate profit—and this goal may come into conflict with objectives such as environmental conservation and responsibly-sourced consumer goods. Impact investing dispels these beliefs by offering opportunities to invest in, and profit from, social and environmental solutions.

Following are specific opportunities that may result from impact investing:

Complement Existing Philanthropic Budgets and Public Sector Resources

It is true that philanthropic budgets and public sector resources address social and environmental challenges. These funding sources, however, are limited. Impact investing can augment existing philanthropic budgets and public sector resources. Since impact investing can satisfy a wide range of social and environmental objectives -- from mitigating global warming to providing basic healthcare to Third World countries -- it can add a significant amount of private sector capital to the two aforementioned funding sources.

Ensure Business Continuity

Unsustainable practices can deplete the planet's resources. Without raw materials that can be turned into goods and services, businesses can be crippled. Impact investing is a great way for companies to avoid this. By investing in social and economic objectives, companies help create benefits such as resource conservation and a healthier workforce. These benefits, can then translate to greater profits and business continuity. While impact investing may cost companies time and money, it is an effective path towards ensuring business continuity.

Attract Client Investors

Millennials (the generation of people born between 1980 and 2000) are regarded as the wealthiest generation in history. As of 2014, according to The Shullman Research Center's report, Insights into Luxury, Affluence and Wealth: Millionaires Have Their Own Generation Gap , millennials constituted 23% of millionaires in the US. This means that there were 5 million millennial millionaires in the US. In contrast, there were only 4 million Gen-X (the generation born between 1960 and 1980) millionaires in the US in the same year.

Impact investing is one way to transform millennials' wealth into business opportunities. US Trust's 2014 survey, Insights on Wealth and Worth , revealed that 67% of millennials viewed their investment decisions as "[ways] to express [their] social, political or environmental values." In addition, 73% of millennials believed that "it is possible to realize market-rate returns investing in companies based on their social or environmental impact." It follows that millennials are a generation of investors committed to furthering the social good, and putting these principles into practice. According to a 2013 Spectrem study, 47.42% and 35.76% of investors below 36 years old are familiar with socially responsible investing and impact investing, respectively.

Draw Resources to an Organization's Projects and Initiatives

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. A soup kitchen, for instance, can develop business plans that will generate both revenue and investment returns in exchange for a larger upfront donation. This plan may carry the soup kitchen towards self-sufficiency while earning profits for the investors.

Strengthen Working Relationships between Stakeholders

Impact investing can strengthen working relationships between stakeholders, and build new ones. An organization that turns to impact investing to augment its resources can meet like-minded innovators and entrepreneurs from the for-profit and the nonprofit sectors that can provide them with needed facilities, products and services. This outcome, in turn, can convince grantees to invest in the organization as well.

Examples of Impact Investing

Impact investing is a rapidly growing industry. According to the Triodos Bank's September 2014 report, Impact Investing for Everyone: A Blueprint for Retail Impact Investing , impact investors committed USD8 billion in 2012, USD10.6 billion in 2013 and USD12.7 billion in 2014. In addition, Impact Investing Trends: Evidence of a Growing Industrya December 2016 report by the Global Impact Investing Network (GINN), claimed that “[investors] grew their impact assets from USD25.4 billion to USD35.5 billion from 2013 to 2015.”

Social and environmental problems affect all sectors of a community. When community members work together towards solving social and environmental problems, they can come up with more resources, and creative and effective solutions such as impact investing. Impact investing frees organizations from heavy reliance on donations and state subsidies, and encourages business to help by allaying their fears of profit loss. Social and environmental problems can be solved, while businesses continue to earn profits.

For a more detailed discussion about Impact Investing, please click here.