Although human societies are now very advanced, many regions still suffer complex and unimaginable social and governance issues like discrimination and poor access to healthcare, not to mention the ravaging environmental crisis brought on by years of neglect. In the last couple of decades, the world has grown more conscious - or weary - of these problems and has become more critical about “impact” and “sustainability”. This has influenced the business landscape by creating social enterprises and birthing investors dedicated to what is known as impact investing. 

What is Impact Investing?

To understand impact investing, it is best to start by reminding yourself of what a donation is. A donation, charity, or other regular philanthropic act involves making financial or kind efforts toward a social or environmental cause without the expectation of any returns whatsoever. Impact investing has all these characteristics except for the last part, meaning that impact investors expect some financial return. In clearer terms, impact investing refers to investments in projects or businesses that create active, sustainable and well thought social or environmental impact while passively generating revenue. Many investors in this field also look at corporate governance concerns in determining what to invest in and how. 

The Impact Investment Market

Impact investments have a whooping market size of over $1.164 trillion, as per the GIIN 2022: Sizing the GIIN Impact Market report. This estimate represents the huge and increasingly growing participation of business management in this remarkable form of investment. The GIIN report also points out to green bonds and corporate impact investment as being the most popular vehicles used by impact investors. Green bonds are just like any other investment bond except they are issued specifically for financing environmentally impactful projects such as pollution reduction or ecosystem restoration. On the other hand, corporate impact investing brings about the involvement of large corporations in impact-focused projects. 

Core Characteristics of Impact Investing

Just like we mentioned, impact investing features some profit-making and a lot of social or environmental impact. The top four characteristics of this are intentionality about impact investing, evidence and impact data, managing impact performance, and contributing to the industry's growth. Here’s what that means in detail. 

Intentionality about Impact Investing:

Ahead of making profits or having some financial return, impact investing is characterised by an investor’s intentionality about contributing to social good through their investment. This purposeful, committed drive towards a social or environmental impact should always come first. It describes the unique nature of every impact investor, and in the same manner, it effectively differentiates impact investing from all other forms of business investment. 

Evidence and Impact Data:

Impact investing deviates from regular investor-type commitments, so impact investors are very special. These investors put their money into projects that are sustainable and beneficial to society while going home with only little to high returns at the end of the day. As you already know, a typical investor shoots for the highest returns they can get. So what do an impact investor benefit from walking a different path? The least possible thing will be to have a solid and almost erasable social impact - something they can look back at and be proud of. This is where the evidence and impact data characteristic comes into play.

Impact investors don’t want their selfless acts to be in vain. They don’t want to invest in any fraudulent or doomed-to-fail businesses. Similarly, they don’t want to be a part of social impact missions that aren’t going to reach their set goals. To ensure all of these results, there is a need for solid evidence and accurate impact data assessments (rather than sentiments or hunches). Such solid evidence and data will be used to drive impact investing decisions, making it possible to decide what social issues need urgent addressing, what impact approaches have worked best, and what areas might need considerations in the near future. 

Managing Impact Performance:

What things need to be done in ensuring that the right steps are taken for the proper execution of an impact mission? This question needs to be asked. And with the right answers, impact investors will be introduced to feedback loops, clear communication, key performance indicators, and other useful analytics. The aspect of managing impact performance will happen more smoothly after properly analysing existing social or environmental problems and determining the best strategy for investment. 

Contributing to the Growth of the Industry:

Another solid characteristic of impact investment is that investors and stakeholders all consciously contribute to the growth of the industry. What this means is that, in addition to social and environmental development, impact investors also make it a duty to support the ecosystem. This might involve supporting the development of new impact investment companies, and training impact investors to identify great opportunities or, simply, to maximise their impact efforts.   

Range of Market Return:

Impact investments target low market returns but they may also look to achieve competitive returns. According to the GIIN 2020 Annual Investor Impact Survey, 67% of 294 respondents mentioned that they sought risk-adjusted market-rate returns. The other 18% mentioned that they preferred below-market-rate returns that are closer to the market rate and the final 15% mentioned that they sought below-market-rate returns that are closer to capital preservation. As for impact investment asset classes, they include everything from cash equivalents to fixed income, venture capital, and down to private equity.

Types of Impact Investment

Two broad types of impact investing exist. These are Environmental, Social and Governance investing (ESG), and Socially Responsible Investing (SRI). 

Environmental, Social and Governance (ESG) Investing:

Environmental, Social and Governance Investing or simply, ESG Investing, is a type of impact investing in which investors prioritise support for companies that are making the most viable efforts towards creating and maintaining environmental, social and governance missions.  

Socially Responsible Investing (SRI): 

Socially Responsive Investing or simply, SRI, is a type of impact investing in which investors only support companies that are strictly aligned with their ethical and moral standards. For instance, they may keep away from companies that deal with alcohol, narcotics, and weapons or technologies for war. 

What Type of Organisations Engage in Impact Investing?

No matter your organisation type and the area or niche it focuses on, there is a high chance that it still falls in as a company that can engage in impact investing. For more clarity, here’s a list of organisations suitable for this form of investment.

Fund Managers:

A fund manager is responsible for handling the investment and trading operations of a fund. Based on this role, fund managers are in a good position to make impact investments that fit into the social objectives of their funds.

Development finance institutions:

Development financial institutions (DFIs) are - just as their name describes - financial institutions that provide low-capital support for businesses focused on economic development. DFIs engaging in impact investment simply promote their aim of fostering growth.  

Diversified financial institutions/banks:

Banks are financial institutions that accept inbound payments in the form of checking and savings and make outbound payments in the form of loans. Many banks worldwide are interested in a "green" economy. This creates a chance for impact investment in companies or organisations that work to reduce greenhouse gases. Many banks prioritise investments in what is known as a “green” economy.  

Private foundations:

Private foundations are owned by private entities. It is not unusual to find these institutions engaging in philanthropic acts. That being the case, private foundations can easily switch to dedicate to making social and economic impacts. They could choose to make profits in the process by switching to impact investing.  

Pension funds and insurance companies:

As unlikely as it might sound, pension funds and insurance companies have good reasons to venture into impact investing. Some of these reasons are that all money has an impact, that there is a potential for attractive returns in the future, and that they have a duty of care to members of their schemes. 

Family Offices:

Family offices refer to investment funds started and owned by high or ultra-high-net-worth families to manage their financial assets. An institution of this nature has the potential to create an intergenerational transfer of values, help in the co-creation of innovative solutions, and build a long-term horizon of investments. This makes them invaluable in impact investing. 

Individual investors:

Individual investors also take on impact investing to support companies that are championing humanitarian missions - or to create one themselves. For many of them, this coincides with their personal dream or passion.

NGOs:

One of the many reasons why NGOs may value the idea of impact investing is that it strengthens their investment portfolio. As a result, they appear more attractive to donors and they may receive more funding which will further drive their push for social and environmental impacts. 

Religious institutions:

The values of religious and faith institutions can be successfully projected through impact investing. And since the investment practice brings in some financial returns, it proves helpful in sustaining the activities of these institutions. 

Corporates:

Corporates also go into impact investing. In fact, it is believed that they are high-end investors since they usually have huge funds lying around. Another interesting thing about corporates is that they have numerous tools through which they can make a social impact, These tools are corporate venture capital, corporate social responsibility, and corporate development. The combination of corporates’ investment potential and channels makes them really suitable for impact investing. 

How Impact Investing Benefits Businesses 

Businesses that are interested in contributing to societies and the world at large are well-positioned to reap the benefits of impact investing. Here’s how:

Access to Large Capitals: 

As a socially impactful business, you will get the attention of impact investors. This translates to having access to large capital, especially when the business is still in the early startup phase. Also, in addition to providing funds for business development, impact investors can offer advice and mentorship to drive a business on its mission to create sustainable social and environmental efforts. 

Meet Their Social Impact Goals:

Every business is required to express some corporate social responsibility which makes it socially accountable to its staff, stakeholders, immediate community, and the world at large. This is less of a priority than it is for others. However, businesses that are head-on on fulfilling this responsibility can be sure of meeting their social impact goals thanks to the growing popularity of social impact investments. 

Generate Revenue:

Truth is that impact investors are probably keen on leaving a positive mark. But they also do this knowing they will have some financial return. And since impact investors receive some amount of revenue, then it becomes certain that the businesses they invest in also generate revenue because this is where stakeholders and investors get their share of the profit from. The highpoint of social enterprise revenue is that it is long-term and more guaranteed compared to regular investments, since impact projects are designed to be sustainable. 

Improves Their Portfolio:

Globally, businesses and individuals are all coming to realise the need to protect the environment and the people living within it. Businesses that take this impact investing as a priority over profit-making are standing out within a growing community of impact focused people from around the world. This is significant in improving the investment portfolio of these businesses, leading to a higher chance of securing partnerships, patronage and deals. 

Build Community Relations:

Positive social impact helps bring communities and social enterprises together in a relationship where the latter initiates impact programs and the former serves as beneficiaries to these programs. The entire process of identifying social issues, getting evidence data, choosing what impact program to prioritise and initiate, and then measuring the impact of your programs involves being in constant talks with communities and making comforting and clear communications with them. 

Real Examples of Impact Investing 

A good number of companies serve as shiny examples of impact investing. The following are some of the most recent mentions by Investopedia:

Vital Capital:

Vital Capital’s goal is to bring development in the form of education, infrastructure, reliable energy, agro-industrial projects, and the likes. The private equity fund holds about $350 million in assets and it majorly invests in Sub-Saharan Africa and other developing regions. 

Triodos Investment Management:

Triodos Bank is the parent company of Triodos Investment Management and it manages over twelve different investment funds. Its focus areas are on education, healthcare, sustainable food and agriculture, as well as renewable energy. With assets of over $5 billion, the bank has assets in India, Southeast Asia, South America, Africa, and Europe. 

Reinvestment Fund:

The Reinvestment Fund is a non-profit organisation with approximately $1.2 billion in assets, a focus on providing impact assistance, policy advice and data analysis services, and an interest in job initiatives, healthcare, housing, education, and funding projects. 

BlueOrchard Finance S.A:

BlueOrchard Finance is a United Nations 2001 program that provides equity financing and debt financing services. It is the “largest commercial microfinance fund in the world”, has $3.5 billion in assets, and has impacted over 260 million people. BlueOrchard looks into issues of climate change. In addition, the institution is interested in building entrepreneurship, reducing poverty and hunger, and increasing food security. 

Community Reinvestment Fund, USA:

The Community Reinvestment Fund is a USA national project that works with local investors to provide capital for community development. The fund supports the building of schools, houses, and other community projects. It has over $250 million in assets, and it also provides loans to businesses for small scale expansion and the likes. 

Conclusion

We have come to find that impact investing is as much a topic as any other investments we are familiar with. However, this one stands out for its focus on the environment and the quality of life of people. The impact investing market size is also very remarkable, portraying an industry that will continue to grow as the world looks to deepen its approach on sustainable impact.

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