Impact investing

Definition

Impact investing refers to the practice of assessing not only the financial return on investment but also the impact of the investment on the social and environmental environment affected by the investments operations and consumption of the product or service which the investment creates.

Background

In the current models of econonomics, an economic externality refers to byproducts created when producing and distributing goods and services. Externalities may be positive (for example in building trusted relationships in a user community) or negative (for example the creation of pollution).

Historically, regulation - and to a lesser extent, philanthropy - was an attempt to minimize the creation of negative externalities. In the 1980's (reference needed) an investment strategy now called negative screening emerged, which had the purpose to avoid investing in specific companies or industries that produced negative externalities. In the 1990's, Jed Emerson advocated the blended value approach, or positive screening 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. (ref needed)

Simultaneously, approaches such as Pollution Prevention Pays, Corporate Social Responsibility, and Triple Bottom Line measured non-financial effects inside and outside of corporations. In 2000, Baruch Lev of NYU Stern School of Management pulled together thinking about Intangible Assets in a book by the same name, which furthered thinking about non-financial effects of corporate production.

Finally, around 2007 (fact-check and reference needed), the term "Impact Investment" emerged, bringing together the concepts of financial investment that employs positive screening by deliberately building intangible assets alongside tangible, financial ones.

The Industry

Market Size

The number of funds engaged in impact investing has grown quickly in the last five years, and a 2009 report from the Monitor Group, a research firm, estimated the impact investing industry could grow from its present $50 billion or so in assets to $500 billion in assets within the next decade. This 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. Its growth is partly in response to criticism of traditional forms of philanthropy and international development, which have been characterized as unsustainable and driven by the goals - or whims - of the donors.

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.

Impact Investment Mechanisms

Impact investments are structured similarly to those in the rest of the Venture capital community. In addition, other types of investment mechanisms are emerging through crowd-sourced investment and debt financing.

• Indiegogo
• Kickstarter
• Kiva

Finally, impact investment is typically made in a for-profit enterprise, but new enterprise structures are emerging.

• B Corporation

Impact Investment Funds

• Acumen Fund
• Grassroots Business Fund
• Small Enterprise Assistance Funds
• Bridges Ventures
• Hub Ventures

Conferences

• Take Action! The Impact Investing Conference
• "SoCap"
• [Greener Minds]
• [Sustainable Brands]

In the Media

Paul Sullivan of the New York Times characterized Impact investing as an "emerging hybrid of philanthropy and private equity." Impact investors follow an investment strategy in which positive social screening criteria are an integrated component of the investment process, whereas the term socially responsible investing may include negative screening criteria in the investment decision.

The investor may take an active role mentoring or leading the growth of the company. This is similar to the way a Venture capital firm will assist in the growth of an early-stage company.

See also

• Double bottom line
• FairPensions
• Socially responsible investing
• Social Return on Investment
• Triple bottom line

External links

• Impact Investments: An Emerging Asset Class J.P. Morgan and Rockefeller Foundation report on the impact investment industry
• Innovations journal - Impact Investing - Volume 6, Issue 3 of MIT Press's Innovations Journal was devoted to the subject of impact investing