Impact investing is an umbrella term for investments made which are intended to create meaningful social or environmental change. The widely accepted definition comes from the Global Impact Investing Network (GIIN) and is:
"Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return."
Impact investing examples
The definition is accompanied by the four key elements of the investment:
- Intentionality: It must be part of the actual intent of the investor that the investment should have a measurable social or environmental impact.
- Financial return: Whilst impact investments are intended to make a financial return this is not the key driving factor or motivation in making the investment decision - that lies with the intended positive social or environmental impact. As a result, financial returns can vary and will usually be expected to be below market rate but in some cases this could be up to or around the expected market rate, and will depend on the factors relating to that individual investment and the aims and strategies of the investor and the recipient.
- Range of asset classes: There is no set form of impact investment and the investments can be made across a wide range of asset classes (cash, equities, revenue participation etc.).
- Impact measurement: The social or environmental impact should be measurable and the investor should seek to gather data on the measurements and report this so as to inform the sector as a whole and contribute to the development of the impact investing field.
In 2019 the GIIN produced a short list of the four core characteristics which should be associated with impact investing, to assist the wider market in defining and further understanding these investment opportunities. The four characteristics can be read about in more detail at the GIIN's website, here, but in summary are:
- Intentionally contribute to positive social and environmental impact through investment alongside a financial return.
- Use evidence and impact data in investment design.
- Manage impact performance.
- Contribute to the growth of impact investing.
Impact investing does expect some form of financial return, even if that is just the return of the initially invested capital. This differentiates it from pure philanthropic giving and/or grant making. A philanthropic gift or a grant will, often subject to certain conditions, not be expected to make a financial return or to be paid back at all. The benefit to the provider of the gift or the grant is, exclusively, the social, charitable or environmental impact that the funds themselves enable. Whilst giving in this way is extremely important, impact investment opens up new sources of capital and new opportunities for investors and recipients alike.
Funders, enterprises, charities and individuals who are interested in seeing their money make a financial return, but who also want to ensure that they are able to contribute to a positive impact on the world, can look to impact investing to enable both outcomes.Environmental, social and governance (ESG) issues are at the top of everyone's agenda in the 21st century as people look to face the challenges of our ever-evolving society, changing climate and diverging economy. Many people also want to ensure that their funds are used in a socially conscious way, or at least in a manner that is not in conflict with the values of the individual or corporate investor (for example a health charity not investing in alcohol or tobacco companies, or an environmentally conscious individual/company not investing in fossil fuels). This is often referred to a socially responsible investing (SRI).Impact investing allows people and institutions to put their money to good use, seeking a positive and measurable impact, whilst still generating a financial return (even if this is lower than the prevailing market rate) and helps further both the relevant ESG and/or SRI goals of the investor.It is attractive to long term investors, such as pension funds, charities, family foundations, some wealth managers and financial advisors.
Impact investing can take many forms, the key aspect always being the intention or motivation of the investor to see that the funds contribute to making a measurable positive impact in the chosen area. Some examples are:
- a loan (which can be secured or unsecured) at a below market interest rate to assist in funding a project which has a defined social or environmental purpose;
- a loan (which can be secured or unsecured) to fund a research project aimed at delivering a report or some other evidence based impact which will then inform a wider discussion in the relevant sector;
- investments in social impact or development bonds;
- investing in community share or bond offers tied to an underlying community project;
- investing (whether by way of loan or equity) at a level closer to, or at, the then market rate of return but with a higher level of risk given the use of the funds will be aimed at producing the desired social or environmental impact and therefore is not focussed itself on maximising profit;
- seed or initial funding for start-up or young enterprises with a targeted social or environmental mission; and
- revenue participation agreements where the return available to the investor is tied to the success of the recipient, or the recipient’s mission.
It will usually be a condition of the funding that the recipient produces regular updates and reports (for example social impact reporting or environmental surveys) which demonstrate how the funds have been utilised and what their impact has been.This is an important process for all parties to be able to measure the impact of the underlying investment as best may be possible. It also helps to demonstrate to the wider world the potential that impact investment has in bringing about tangible positive change.It is important to note that social and environmental change will usually occur over a period of time, and immediate change is often unlikely. Impact investors therefore look to measure what the output of the underlying project may be, rather than the outcomes themselves, as this is easier to quantify in the shorter term (for example it would be easier to measure the number of new affordable homes built by a construction project in a deprived area of a city, than to immediately see the impact the availability of such homes has of reducing the homeless population of that area, or other social problems).