What is Impact Investing?

Here’s all You Need To Know.

Impact investing refers to a specific type of investment made in companies, organizations, and funds geared towards creating both environmental and social impact while still providing a financial return on capital and responding to social needs that are still not satisfied. It seeks to find new ways to distribute existing services and the construction of new solutions of collective interest.

To achieve this, impact investing combines and involves the following important factors:

– Capital

– Entrepreneurship

– Focus on results

– Financial and Managerial Skills

– Partnerships between Investors and Social Entrepreneurs

One distinguishing characteristic of impact investing is the commitment investors have to measure and report the environmental and social performance to ensure transparency. The goal of impact investing is using skills and economic resources of private investors to promote solutions geared towards resolving social needs that are not covered by either the market or government.

How Does Impact Investing Work?

Impact investing comprises of several stages. The investor typically donates money as well as their strategic and entrepreneurial skills to the organization, fund, or company that’s involved in the (mostly) for-profit impact investment project.

Upon receiving these resources (financial and non-financial), the entity invests them in projects whose primary focus is bringing about meaningful social change. The commitment to investing in such projects then attracts more investors to join in these social impact investments.

Impact investing is not charity work. The resources are invested with the intention of creating tangible and sustainable social and environmental impact while generating robust financial returns. Impact investing doesn’t hold the view that impact outcomes necessarily require the sacrificing of financial gain.

What Constitutes an Impact Investment?

Impact investing is often summarized by the following statement: doing well by doing good. One question that almost every investor asks after hearing about impact investing and the opportunities it presents is how one can make the most of these opportunities. What are the gaps that require filling? What’s required to facilitate a greater portion of investments that focus on impact?

Impact investments currently attract a lot of interest and many products are being launched all claiming to target impact. However, there’s still no common discipline for managing impact investments as well as the systems required to support it. Unfortunately, this has created confusion and complexity for investors besides the lack of a clear distinction between impact investing and other forms of responsible investing.

Having a common discipline and market consensus on the best way to manage impact investments is one way for asset owners to differentiate between impact investments and other kinds of responsible investors and allow asset managers to follow best practices in the management of impact investment funds.

The best practices were developed by a group of asset owners, allocators, and managers to ensure discipline around impact investing, to mobilize more impact investment funds, as well as increase the potential impact likely to be achieved by such funds.

Social enterprises or social enterprises intended specifically to achieve impact are one area of focus for the impact investing market. However, impact investors can also find opportunities for achieving impact by investing in commercial enterprises that they might not, themselves, have the intent of achieving impact.

Ultimately, the definition of what constitutes an impact investment rests on the intent of the investor to have an impact as opposed to the intent of the investee entity or enterprise.

How Is Impact Investing Different from Mainstream Investing?

Impact investing adds another objective to the management of an investment portfolio. Besides obviously aiming for financial gain, impact investors also seek to make a positive impact on the targeted economic, social, or environmental goals.

It requires the integration of impact considerations along with financial considerations into the investment strategy of the portfolio, into decisions regarding whether to buy and sell assets, as well as into the data and information managed and monitored by investors.

Impact investors have varying appetites for financial risk as well as different targets for financial returns, as with other forms of investing. Such investors also target varying impact goals, as well as the scale of impact they aim to achieve. Impact investing isn’t synonymous with sacrificing financial performance.

The pioneers of impact investing were development finance institutions, philanthropic organizations and foundations, as well as the specialist impact fund managers. A wider range of asset owners today seek to achieve impact with the investments they make.

Asset managers are increasingly offering impact investment products besides their mainstream investment products to meet the demand for impact investing.

Why is Impact Investing Important?

Capitalism, in its current form, has increasingly come under scrutiny in recent years. Boundaries are no longer clear between social enterprises, financial institutions, global bodies, and governments. The notion that firms exist primarily for the purpose of maximizing the welfare of those that own it (i.e. Shareholders) is now outdated.

Impact investing has been presented as a viable alternative for reshaping the relationship that exists between the public good and individual wealth and releasing the potential that private money has to make a meaningful social impact.

The key objective of impact investments is bringing about sustainable change. Such investments are found across the charitable sector, social businesses, and social enterprises, and among mainstream listed ethical investment products. Impact investments are driving creative solutions aimed at tackling social issues such as economic development, gender equality, poverty, human rights, and even health.

If properly managed, impact investing has the potential to satisfy the needs of all parties since it gives a financial and social return thus enabling NGOs, social enterprises, and charities to be innovative, grow, and improve their own sustainability as well as the lives of the beneficiaries, public services, and society at large. Impact investors have the opportunity to embrace a different form of capitalism and generating a measurable impact on society.

Private and institutional investors are in a perfect position to broaden the relationship with their clients by advising them on impact investments. If they start offering impact investments, they can provide clients with many investment options to choose from and deepen their relationships with them too.

The Pros and Cons of Impact Investing.

The Pros & Benefits

1. The Opportunity to Practice What You Believe In

If a person is a passionate environmentalist at heart, it can be difficult for such an individual to prove to others that they are actually committed environmentalists if part of their financial portfolio is invested in companies and industries that have been accused of environmental degradation.

If such a person invests in an environmentally responsible organization, he/she would be demonstrating his/her commitment through action instead of just proclaiming it verbally. Such an individual would be actually walking the talk with regards to investing their money.

2. Practicing Non-Cooperation with Irresponsible Businesses

If a person is supporting the cause and showing complete dedication to impact investing, it is the perfect opportunity for him/her to withdraw or withhold their investment money from organizations that are not so responsible.

3. Rewarding Good Businesses

Impact investing ensures that only good organizations around the world are rewarded in the long run. It rewards the organization that acts responsibly and ethically while punishing those that act unethically and irresponsibly.

4. Enjoying the Feel-Good Factor

Impact investing allows investors to feel good about the whole experience. It would bring about a sense of fulfillment or happiness for doing things that the person has always wanted to do. While obviously nobody is perfect, most people believe in doing good.

If a person is able to invest their money in doing something good, nothing could ever match that level of fulfillment. It would be quite a good feeling to earn profits after investing in organizations that are socially and environmentally responsible.

Impact investing can be a genuinely rewarding experience that allows a person to make money while improving the environment and human condition, which makes it a win-win-win situation.

Downside?

The Financial Aspects Are Often Ignored.

Impact investing focuses more on the social responsibility aspect than on financial returns. It is impossible to ignore the fact that people usually invest for the purpose of earning profits, which means that achieving the highest ROI possible should always be the focus. If social responsibility is the main if not the only focus, the financial aspect of the investment would suffer.

Excellent Opportunities for Investing Are Wasted

Investors that choose impact investments may find themselves wasting a lot of profitable opportunities for investing. For instance, suppose a person gets the chance to invest in an organization that’s not too environmentally conscious or socially responsible but has an excellent record of coming up with innovative products that fuel job creation. Ignoring such a winning opportunity for investing purely because of the social responsibility aspect would be letting an excellent opportunity to invest go to waste.

Top Impact Investing Funds

1. Vital Capital Fund

The Vital Capital Fund has about $350 million in assets. The private equity fund invests in developing regions, mainly sub-Saharan Africa, in projects and businesses geared towards enhancing quality of life for recipients while offering substantial returns for investors.

The Vital Capital Fund’s primary investment focus is on the development of housing projects, infrastructure, renewable energy, education, healthcare, among many other projects. Some of the fund’s investment projects include WaterHealth International and Angola’s Luanda Medical Center.

2. Triodos Investment Management

A subsidiary of Triodos Bank, Triodos Investment Management has its headquarters in the Netherlands and currently manages over a dozen sustainable investment funds. It is one of the founding members of the Global Impact Investing Network and its investments are spread throughout South America, Europe, Southeast Asia, India, and Africa.

It has approximately $335 million in assets and has been involved in impact investment projects since 1995. The primary areas of interest for Triodos Investment Management include healthcare, sustainable real estate projects, arts and culture, renewable energy, as well as organic farming

3. The Reinvestment Fund

The Reinvestment Fund is a non-profit community development financial institution with its headquarters in Philadelphia, Pennsylvania. It has more than $300 million in assets under management and finances educational programs, access to healthcare, housing projects, as well as job programs.

The Reinvestment Fund operates primarily by helping out distressed communities and towns throughout the United States. It also provides cities in the United States with policy advice along with data analysis services to aid in the development of community programs.

4. BlueOrchard Finance S.A.

BlueOrchard Finance has its principal offices in Zurich and Geneva, Switzerland and operates in over 50 frontier and emerging markets in Africa, Latin America, Eastern Europe, as well as Asia. It was created as part of a United Nations initiative and has provided microfinancing for over 20 million entrepreneurs around the globe since its inception back in 2001.

BlueOrchard Finance provides both equity and debt financing to institutions and businesses, with an emphasis on poverty and hunger alleviation, establishing food production, fostering entrepreneurship, promoting education programs, and addressing the challenge of climate change-related issues. It has about $280 million in assets under management.

5. Community Reinvestment Fund, USA

Founded in 1988 in Minneapolis, Minnesota, Community Reinvestment Fund is a non-profit certified community development financial institution. It operates in 47 U.S. states and partners with local private lenders to finance community development projects.

Funding the Community Reinvestment Fund provides includes small business loans used to grow businesses, increase the energy efficiency of businesses, or expand staff. It also provides funding assistance for schools, community housing projects, community facilities, and even daycare centers.

The Community Reinvestment Fund has more than $250 million in assets as well as access to loan capital through the CDFI Bend Guarantee Program. The Community Reinvestment Fund is able to access long-term capital through the Bond Guarantee Program that it can use to finance eligible community projects such as community health care centers, charter schools, as well as small businesses.

6. Lekela Power

Lekela Power is a renewable power generation company that delivers utility-scale projects that supply clean energy to communities across Africa. The current portfolio of the company includes over 1,300 megawatts across projects in Senegal, South Africa, Ghana, and Egypt.

7. Creditas

Creditas provides a digital secured lending platform designed for financing, lending, and investment at lower-than-market interest rates. It provides consumer loans to Brazilians at affordable rates by using borrower collateral such as investors’ automobiles and homes or by partnering with other traditional financial institutions to provide borrowers with funds for a quarter of what they usually pay to traditional lenders.

8. Ellevest

Ellevest is a digital investment platform designed to allow women to be more in control of their investments. Ellevest’s digital financial advisory platform uses an advanced algorithm that incorporates the unique trajectory of women’s salaries and assets and recommends goal-specific portfolios, savings, and target amounts to develop customized investment plans that allow women investors to optimize market returns and prioritize their financial goals.

9. CleanFund

CleanFund is a leading provider of financial services geared towards making it affordable and easy to finance water, energy, and other important improvements. The company provides long-term services and authorizes municipalities to work with private capital providers to provide commercial property owners with financing for qualifying improvement projects that allow clients to reduce their environmental impact and increase their value.

Impact Investing Conferences

International impact investing conferences are an excellent way to learn and connect with other people in the impact space. Impact investing conferences are far too many to detail here in their entirety, but the ones listed below are some of the most well-known:

The GIIN Investor Forum (2-3 October 2019)

It is the largest impact investing conference of the year with professionals from all over the world in attendance. The 2-day conference will provide attendees with timely content covering the entire spectrum of impact strategies and assets. It is the perfect opportunity for impact investors and professionals to connect with peers and industry leaders alike.

GSG Impact Summit (18 – 20 November 2019)

The Impact Economy, which seeks to drive climate, economic, and social justice is slowly but surely taking shape. What are the building blocks for this new impact economy? What opportunities does the impact economy offer investors, consumers, governments, and businesses? Hundreds of impact investors, leaders, and entrepreneurs will discuss these questions and many others at the GSG Impact Summit.

Unreasonable Impact World Forum (7 November 2019)

The Unreasonable Impact World Forum is inspiring, thought-provoking, and fast-paced. It will introduce attendees to some of the most influential companies around the glove solving some of the most pressing changes while creating the jobs of the future.

The 94 companies in the partnership operate in over 180 countries and currently reach over 187 million people around the globe. The companies are implementing groundbreaking and rapidly scaling solutions to what was believed to be previously impossible.

Mission Investors Exchange National Conference 2020)

The conference is produced every other year and is a highly anticipated event for impact investors in philanthropy. It seeks to offer a collaborative, action-focuses, and personal space for building and renewing partnerships, sharing investment opportunities, experiencing on-the-ground impact investment, and shaping the future of impact investing.

Sustainable Brands Conference (8-9 October 2019)

The Sustainable Brands Conference, 2019 will be held in Kuala Lumpur, Malaysia. It is aimed at providing yet another interesting perspective as design and sustainability leaders from all over the globe gather to share profitable business models capable of delivering brand purpose. Attendees will join intelligence, business, sustainability, and finance leaders to discover innovative ideas, tools, and methodologies capable of capturing the tangible business value and translate that into financial performance.

Impact investing conferences are aimed at bringing together individuals that are pioneers in impact investing and create a platform for professionals that would like to learn more or want to make a difference in this rapidly expanding field. It is hoped that the conferences will bring new light to the importance of investing for social and financial returns and provide an opportunity for new people to join the movement.

Final Thoughts On Sustainable Investments

Impact investing is a form of investing aimed at generating social and environmental impact while generating a financial return. It has gained a huge following in recent years and has even been hailed as one possible solution to the drawbacks of capitalism in its current form.

Still, there are concerns that it is still not mainstream enough, which is a necessary condition for impact investing to make any meaningful change in society. Investors should be guided to select a project that brings about meaningful social and financial change if impact investing has any chance at succeeding.

Impact investing has its positive aspects and drawbacks. However, the positives greatly outweigh the negatives. People looking for a different investment vehicle or want to invest in organizations that align with their principles should definitely try out impact investing.