Types of Impact Investors
Impact investors can be individuals or various types of organizations, and range from the person or entity holding the asset to the people making and/or managing investment decisions. Apart from individual investors, the following (while not an exhaustive list) are organizational types which might pursue impact investing strategies:
While not as common, a growing number of private foundations are making impact investments. They do this both as a way to fulfill their mission through those investments and as a way to protect/grow their endowments. See why social impact should start with foundations.
Development Finance Institutions (DFIs)
While each DFI may have its own definition of impact investing, or where it falls on the spectrum of impact investing strategies, their focus tends to be the deployment of catalytic capital in emerging markets or simply in markets lacking private investment flow.
The private banking sector is also growing its foothold in the impact investing world impact areas such as agriculture, education, and social finance. Other banks, like Beneficial State Bank, have created foundations which own 100% of the economic rights of the bank and use that profit to make community-related investments.
Another newer actor to the sphere of impact investing, pension funds are beginning to take the impact investing market more seriously. According to the World Economic Forum, only 6% of the pension funds in the United States have made an impact investment, although that number is expected to rise dramatically -- 64% say that in the future they plan to do so.
Non-Governmental Organizations (NGOs)
With more and more donors moving from philanthropy to impact investing, NGOs are also seeking to diversify funding sources by structuring impact investment opportunities. According to KPMG, NGOs can look to source and mediate deals between local constituents and impact investors, or design new interventions and seek impact investments themselves.
Impact Investing Due Diligence
As with any investment, the impact investing process involves a due diligence phase to assess the returns expectations of the investment.
Of course, this phase includes review of the financial indicators one might assess for a traditional investment. But it also includes impact due diligence, which is a bit more subjective in nature(depending on the needs or intentions of the investor).
Impact due diligence processes seek to understand the potential impacts of an investment and how they will be measured and reported. In an investment scenario in which an investor wants to directly invest in a company, to begin an impact due diligence process they might ask themselves questions like:
- How does this company address a social need?
- Is addressing this social need a core driver of the business?
- Does its commercial approach lend itself to creating positive impact in this area?
- Does it have an impact measurement system in place? What indicators does it use?
- Are they aware of and/or mitigating any negative externalities of their business practices?
The key here is to assess the ‘impact risk’ of the investment. There is inherently more risk in investing in one company than investing in an impact fund. The tradeoff is that in the former your capital is put to work directly for a cause and the ‘impact return’ is more easily defined. With an impact fund the impact returns would be spread across the assets in the portfolio and impact measured by the performance of that fund as a whole.
See how impact data collection is changing?