Impact investing

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Impact investing is one form of socially responsible investing and serves as a guide for various investment strategies.[1] According to the definition of the Global Impact Investing Network (GIIN): "Impact investments are investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below-market to above-market rates, depending upon the circumstances."[2] Impact investing tends to have roots in either social issues or environmental issues, and has been contrasted with microfinance.[3] Impact investors actively seek to place capital in businesses, nonprofits, and funds that can harness the positive power of enterprise. Impact investing occurs across asset classes; for example, private equity/venture capital, debt, and fixed income.

Impact investors are primarily distinguished by their intention to address social and environmental challenges through their deployment of capital. For example, criteria to evaluate the positive social and/or environmental outcomes of investments are an integrated component of the investment process. In contrast, practitioners of socially responsible investing also include negative (avoidance) criteria as part of their investment decisions.[4][5]

Background[edit]

Historically, regulation—and to a lesser extent, philanthropy—was an attempt to minimize the negative social consequences of business activities. However, a history of individual investors using socially responsible investing 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.[6] In the 1990s, Jed Emerson advocated the blended value approach; that is, for foundations' endowments to be invested in alignment with the mission of the foundation, rather than to maximize financial return, which had been the prior accepted strategy.[7]

Simultaneously, approaches such as pollution prevention, corporate social responsibility, and triple bottom line began as measurements of non-financial effects, both inside and outside of corporations. In 2000, Baruch Lev, of the NYU Stern School of Business, collated thinking about intangible assets in a book of the same name, which furthered thinking about the non-financial effects of corporate production.[8]

Finally, around 2007, the term "impact investment" emerged — an approach that deliberately builds intangible assets alongside tangible, financial ones.[9]

The Industry[edit]

Market Size[edit]

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 estimated that the impact investing industry could grow from around US$50 billion in assets to US$500 billion in assets within the subsequent decade.[10] Such capital may be in a range of forms, including equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology.[10] The growth of impact investing is partly attributed to the criticism of traditional forms of philanthropy and international development, which have been characterized as unsustainable and driven by the goals—or whims—of the corresponding donors.[citation needed]

Many development finance institutions, such as the British Commonwealth Development Corporation or Norwegian Norfund, 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.[citation needed]

Impact investing is distinguished from crowdfunding sites, such as Indiegogo or Kickstarter, because impact investments are typically debt or equity investments over US$1,000—with longer-than-traditional venture capital (VC) 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. Impact investing is distinguished from microfinance (such as the MYC4 company) primarily by deal size, and secondarily by the investment for equity rather than debt.[citation needed]

Organizations receiving impact investment capital may be set up legally as a for-profit, not-for profit, B Corporation, Low-profit Limited Liability Company, Community Interest Company, or other designations that may vary by country. In much of Europe, these are known as 'social enterprises'.[11]

Impact investment mechanisms[edit]

Institutional investors[edit]

Impact investments occur across asset classes and investment amounts. Among the best-known mechanism is private equity or venture capital. Impact investments can also be made by individual angel investors - examples of which include Investors' Circle in the US,[12] Clearly Social Angels in the UK [13] and Toniic throughout Europe.[14] "Social venture capital," or "patient capital," impact investments are structured similarly to those in the rest of the VC community. Investors may take an active role mentoring or leading the growth of the company,[15] similar to the way a VC firm assists in the growth of an early-stage company. Hedge funds and private equity funds may also pursue impact investing strategies.[16]

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.[17] 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 (Impact Amplifier (Cape Town, South Africa) and Open Capital Advisors (Nairobi, Kenya) are two examples in Africa).[citation needed]

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.[18]

Mission investing[edit]

Mission investments are investments made by foundations and other mission-based organizations to further their philanthropic goals.[19] They include any type of investment that is intended and designed to generate both a measurable social or environmental benefit and a financial return:

  • Program-related investments (PRIs) or other concessionary (below-market rate) investments are primarily made to achieve programmatic rather than financial objectives. This category includes grant support, equity (stock), subordinated loans, senior loans, below-market cash deposits and loan guarantees.
  • Market-rate investments (MRIs) expected to generate a market-rate financial return on investment comparable to an ordinary investment of a similar type and risk profile. They are designed to have a positive impact while contributing to the foundation’s long-term financial stability and growth. This category includes market-rate cash deposits, fixed income (bond), private equity and public equity (stocks).[20]

The F.B. Heron Foundation Mission-Related Investing Continuum

Impact investing for individuals[edit]

Impact investing primarily takes place through mechanisms open to institutional investors. However, there are ways for individuals to participate in providing early stage or growth funding to ventures that blend profit and purpose. These include RSF Social Finance, Calvert Foundation, Mosaic, and Microplace, as well as private impact-focused financial advisors such as HIP Investor.[citation needed] Other opportunities available to individuals include the Institute for Community Economics' Investor Note, the Calvert Foundation's Community Reinvestment Note, or the Enterprise Community Partners' Community Impact Note. Where an account or fund is subject to ERISA—that is, it holds corporate or Taft-Hartley pension plans—legal limitations determine the extent to which investment decisions can be based on factors other than maximizing the economic returns of plan participants.[21]

A new class of web-based investing platforms, which aims to bring impact investing into the reach of ordinary individuals with average incomes, also exists. As equity deals can be prohibitively expensive for small-scale transactions, microfinance loans, rather than equity investment, are prevalent in these platforms. Microplace was an early United States (US) pioneer in bringing impact investing within the reach of individuals of modest income, whereby residents of most US states can participate in debt funding to microfinance institutions in developing countries, with interest payouts averaging around 3%.

Zidisha is a US nonprofit that launched the first international person-to-person microfinance lending platform in 2009. Lenders may invest as little as one dollar in Zidisha loans and negotiate interest (ranging from 0% to 15%) directly with individual loan applicants in developing countries.[22] Kiva may also be considered an impact investing platform for individual lenders. Kiva loans do not offer interest to lenders.[23]

Impact investment networks also exist to bring together individuals with an interest in impact investing. Investor networks may have in-person meetings and/or online platforms to facilitate the identification of suitable investment opportunities. Investor networks may or may not have a pool of funds to invest on behalf of the network. Often, the role of the network is to bring together investors and those representing opportunities; however, the amount of due diligence investor networks enact in the assessment of deals varies.[citation needed] In addition there are companies like Maximpact that are designed as digital platforms that connect entrepreneurs, philanthropists and investors for free with the idea of collaboration within a wide range of impact investing sectors. Sectors such as biomimcry, agriculture, clean technology, ecotourism, fair trade, environment and clean energy.

Metrics, standards and data[edit]

A com­mit­ment to meas­ur­ing social and envir­on­mental per­form­ance, with the same rigor as that applied to fin­an­cial per­form­ance, is considered a crit­ical, even indispens­ible, com­pon­ent of impact invest­ing.[24][25]

  • IRIS, managed by the Global Impact Investing Network, is the catalog of open-source performance metrics that many impact investors use to measure social and environmental impact.
  • The Global Impact Investing Rating System (GIIRS) is a comprehensive and transparent system for assessing the social and environmental impact of developed and emerging market companies and funds with a ratings and analytics approach analogous to Morningstar investment rankings and Capital IQ financial analytics.
  • The National Community Investment Fund uses Social Performance Metrics as a transparent way to evaluate a bank’s impact in economically distressed communities, using both quantitative and qualitative measurement.
  • Toniic, a global network of action-oriented impact investors, publishes an E-Guide to Impact Measurement, which shares practices of Toniic members around impact measurements and providing recommendations for assessing impact for seed-stage investments.[26]

See also[edit]

References[edit]

  1. ^ Lemke and Lins, Regulation of Investment Advisers, §2:158 (Thomson West, 2013)
  2. ^ "About Us". Global Impact Investing Network (GIIN). Global Impact Investing Network (GIIN). 2013. Retrieved 15 December 2013. 
  3. ^ "Lessons Learned from Microfinance for the Impact Investing Sector". Impact Investing Policy Collaborative (IIPC). Impact Investing Policy Collaborative (IIPC). 2013. Retrieved 16 December 2013. 
  4. ^ JP Morgan Report, Impact Investments: An Emerging Asset Class, 29.11.2010
  5. ^ Domini, Amy (14 March 2011). "Want to Make a Difference? Invest Responsibly". The Huffington Post. Retrieved 26 November 2011. 
  6. ^ Hayat, Usman (04/11/2012). "Impact investing: making money the charitable way". Financial Times. Retrieved 14 August 2014.  Check date values in: |date= (help)
  7. ^ Billy Parish (August 2012). "Mosaic Conversations: Jed Emerson and the Emerging Impact Investment Ecosystem". Mosaic. Mosaic Inc. Retrieved 15 December 2013. 
  8. ^ Transcript from Intangible assets by Baruch Lev
  9. ^ "The State and Future of Impact Investing". Forbes. 2012-02-23. Retrieved 14 August 2014. 
  10. ^ a b Jessica Freireich and Katherine Fulton (January 2009). "Investing for Environmental and Social Impact" (PDF). Monitor Institute. Monitor Institute. Retrieved 15 December 2013. 
  11. ^ Sherwood, Bob (04.08.2011). "Social enterprise start-ups blossom". Financial Times. Retrieved 08.10.2014.  Check date values in: |date=, |accessdate= (help)
  12. ^ Field, Anne (01.04.2013). "Investors' Circle Continues Its Upward Spiral". Forbes. Retrieved 08.10.2014.  Check date values in: |date=, |accessdate= (help)
  13. ^ Cohen, Norma (2013-03-22). "Making good and doing good". The Financial Times. Retrieved 08/10/2014.  Check date values in: |accessdate= (help)
  14. ^ Say, My (5.02.2013). "5 Key Trends In Impact Investing". Forbes. Retrieved 08.10.2014.  Check date values in: |date=, |accessdate= (help)
  15. ^ Financial Advisor Magazine (2 June 2010). "Wealthy Attracted To Impact Investing". NASDAQ. NASDAQ. Retrieved 15 December 2013. 
  16. ^ Lemke, Lins, Hoenig and Rube, Hedge Funds and Other Private Funds, §6:43 (Thomson West, 2013)
  17. ^ Baird, Ross (June 2013). "Bridging the "Pioneer Gap": The Role of Accelerators in Launching High-Impact Enterprises". Aspen Institute. Retrieved 08.10.2014.  Check date values in: |accessdate= (help)
  18. ^ New York University's Centre for Global Affairs, The Enterprise Development Report (July, 2013)[dead link][dead link]
  19. ^ Berliner, Peter. "About Mission Investing". Mission Investors Exchange. Retrieved 19 November 2014. 
  20. ^ Berliner, Peter; Spruill, Vikki (September 2013). "The Many Forms of Impact Investing". Community Foundation Field Guide to Impact Investing. 
  21. ^ Lemke and Lins, ERISA for Money Managers, §§2:122 - 2:124 (Thomson West, 2013),
  22. ^ Melinda Fulmer (21 April 2012). "Is Microfinance for You?". Entrepreneur. Entrepreneur Media, Inc. Retrieved 15 December 2013. 
  23. ^ Julia Kurnia (27 August 2012). "Kiva vs. Zidisha: Comparing Microfinance Alternatives". Daily Kos. Kos Media, LLC. Retrieved 15 December 2013. 
  24. ^ Is 'Impact Investing' Just Bad Economics?
  25. ^ Luther M. Ragin, Jr. "Investing with Intent for Impact". SNS Impact Investing. SNS Impact Investing. Retrieved 15 December 2013. 
  26. ^ Toniic (Fall 2012). E-Guide to Impact Measurement http://www.toniic.com/wp-content/uploads/2011/12/Toniic-E-Guide-to-Impact-Measurement.pdf |url= missing title (help). Retrieved 21 November 2014. 

External links[edit]