Impact investing refers to 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." Impact investing tends to have roots in either social issues or environmental issues, and has been contrasted with microfinance. 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.
Historically, regulation—and to a lesser extent, philanthropy—was an attempt to minimize the negative social consequences of business activities.[needs reference] 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. 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.
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.
Finally, around 2007, the term "impact investment" emerged — an approach that deliberately builds intangible assets alongside tangible, financial ones. A commitment to measuring social and environmental performance, with the same rigor as that applied to financial performance, is considered a critical, even indispensable, component of impact investing.
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. 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. 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.
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 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 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.
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'.
Institutional Impact Investing
Impact investments occur across asset classes and investment amounts. Among the best-known mechanism is private equity or venture capital. "Social venture capital", or "patient capital", impact investments are structured similarly to those in the rest of the venture capital community. Investors may take an active role mentoring or leading the growth of the company, similar to the way a venture capital firm assists in the growth of an early-stage company. Hedge funds and private equity funds may also pursue impact investing strategies.
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. 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.
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.
Mission investing by Foundations
Mission investments are investments made by foundations and other mission-based organizations to further their philanthropic goals. 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. For private foundations, PRIs count towards the required 5 percent annual payout.
- 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).
Impact Investing by Individuals
Impact investing historically took place through mechanisms aimed at institutional investors. However, there are ways for individuals to participate in providing early stage or growth funding to such ventures.
Exchange-traded funds like the SPDR Gender Diversity ETF (NYSE Arca: SHE) from State Street are publicly traded and hence available to anyone with a stock brokerage account. Morgan Stanley Capital International offers 11 environmental, social and governance index ETFs, including popular low-carbon and sustainability indexes.
Syndicate or Pooled Investing
Groups of angel investors focused on impact, where individuals invest as a syndicate also exist. Examples include Investors' Circle in the US, Clearly Social Angels in the UK  and Toniic in Europe.
Digital Microfinance Platforms
Web-based investing platforms, which offer lower-cost investing services, also exists. As equity deals can be prohibitively expensive for small-scale transactions, microfinance loans, rather than equity investment, are prevalent in these platforms. MyC4, founded in 2006, allows retail investors to loan to small businesses in African countries via local intermediaries. Microplace was an early United States provider of such services which ceased taking on new loans in 2014, stating that its results "haven't scaled to the widespread social impact we aspire to achieve".
Impact Investing in Asia Impact Investing in Asia is a burgeoning sector with many funds currently in play. However, many funds suffer from finding robust levels of investment opportunities for their pipeline given their ability to hedge internal requirements and risks and a potential inability to exit the various investments that they are invested in.
- Double bottom line
- Financial inclusion
- Social finance
- Social return on investment
- Socially responsible investing
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- Bugg-Levine, Anthony (2011). Impact Investing: Transforming How We Make Money While Making a Difference (1 ed.). John Wiley & Sons. ISBN 0470907215.
- Transcript from Intangible assets by Baruch Lev
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- Is 'Impact Investing' Just Bad Economics?
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- Lemke, Lins, Hoenig and Rube, Hedge Funds and Other Private Funds, §6:43 (Thomson West, 2013)
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- 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
- Stanford Social Innovation Review's blog series "Impact Investing's Three Measurement Tools"