Impact investing seeks to generate two things, a financial return and positive social or environmental impact.
The extent sought in either category depends on the lens of the investor. Impact investing capital can be directed to a variety of asset classes, including direct investment in profit-seeking enterprises. Any market, developed or otherwise, is a candidate for such capital.
Impact areas are varied but include renewable energy, education, microfinance, agriculture, and healthcare. The Sustainable Development Goals offer a framework for impact investors seeking to invest using a thematic approach.
Impact Investing Market Size
In a 2017 survey of the global community of impact investors ( impact funds, development finance organizations, family foundations, etc.), the Global Impact Investing Network (GIIN) reported that those 200+ entities manage more than $100 billion in impact assets.
Just a year later, in that same annual survey, that number jumped from $100 billion to $228 billion in impact assets (with a slightly larger sample size). In 2017 alone, respondents invested more than $35 billion across 11,000 impact investment deals and in 2018 that number is expected to grow by 8%.
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 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.
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:
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.
The spectrum of impact investing is a dynamic one, but attempts have been made to break down the range of impact investing approaches. One of the most notable comes from Sonen Capital and is pictured below.
At one end of the investing spectrum we have traditional investing, which seeks financial returns with no impact lens whatsoever. At the other end we have philanthropy, and impact first approach with no financial return expectation. In between is where it gets interesting, and is where impact investing lives.
The first two categories on the spectrum after traditional investing are still driven primarily by financial performance. But an impact lens is beginning to take form. Negative ESG (Environmental, Social, and Governance) screening, for example, is an approach which attempts to keep capital from being allocated to assets involved in “harmful” sectors of business. How that is defined is up to the investor or the fund, but some examples are given in the image above.
What follows is Sustainable Impact Investing, which takes those ESG factors into account alongside the financial returns expectation. Capital is allocated to assets which contribute positively to one or more of those ESG elements (even if somewhat indirectly) while also performing well financially. The idea is that investment opportunities that have good ESG scores will improve overall financial performance, and those with poor ESG scores will have poorer financial returns.
Thematic impact investing directs capital towards pre-defined impact areas (defined by the investor) while financial returns are also sought as a parallel priority. It is common for impact investors to have impact areas that they are more passionate about and thus have their portfolios constructed around this impact-seeking ambition.
Such investors seek specific solutions to this impact need. For example, an investor may see lack of access to drinking water as one of the greatest threats to humankind and therefore seeks to invest primarily in solutions addressing this need. Themes could also be broken down by region, for example, focusing investments in Southeast Asia.
As the name suggests, the impact area takes priority as the driver of investment decisions. Financial returns ares still a factor, though not a dominating one. This category often demands a higher risk tolerance on the financial side, for example, targeting early stage solutions which haven’t had as much commercial validation but which have highly scalable impact potential. Or, the investment could be structure as an injection of patient capital into an asset, where priority is the social or environmental success of the impact-seeking endeavor and financial returns are either likely to be below market rate (this is a known factor) and/or paid back over long periods of time. Here are few examples of impact investing that will give you hope for the system change.
The GIIN’s ImpactBase provides a comprehensive list of impact investment products, including a directory of impact investing funds worldwide.
Best for the World also has a useful breakdown of their Top 50 impact funds (from 2016), including a rating system of each one across a variety of categories.
Lastly, the Toniic Directory, which is sourced from Toniic’s worldwide impact investor network, can be used to search for impact investment opportunities across asset classes.
Raise capital for social entrepreneurs, nonprofits & impact investors.
Global Impact Investing Network The GIIN
Open Source & Practical Framework for Measuring Social Impact