Impact investing seeks to generate two things, a financial return, and a 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.
WHAT IS IMPACT INVESTMENT?
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 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%.
Listen to a powerful presentation from Amit Bouri, GIIN Co-founder and CEO, on trends in impact investing. According to Amit, impact investing has made tremendous progress. However, current progress is not enough to make a long-term system change to reduce income inequalities, which have grown even more after the COVID-19 Pandemic. The current system is not working. Everyone from business, impact investment to philanthropy needs to make a significant shift to improve the environment and equality and equity.
How do investments contribute to the achievement of impact?
Don't simply avoid harm or benefit stakeholders.
Trillions of dollars are invested worldwide without considering environmental, social, and governance (ESG) issues and how their risks are directly related to investment performance. Although there's evidence on the financial materiality of ESG issues to portfolio value, poor investment decisions are continuously being made.
Investment consultants and managers are now starting to consider ESG in their investment decisions and pursuing ESG opportunities. Still, they don't have the systems and processes necessary to support these risks' implementation and management. To achieve high-impact solutions, it's necessary to make use of suitable measurement and management solutions.
Sopact has developed Impact Cloud® to better report against these non-financial goals.
Contribute to Solutions
Impact investments, by definition, are intentional and contribute to social and environmental outcomes.
According to GIIN Core Characteristics of Impact Investing, investors should set transparent and long-term financial and impact goals and design a clear investment thesis and measurable actions to achieve those goals. On top of that, the investments selected should align with the defined strategy.
IFC's Operating Principles for Impact Investing require investors to define strategic impact objectives consistently across the portfolio.
Shared Value Creation
If impact investing truly impacts, it should be about systemic change, new ways of deploying capital, and the capacity building of the players on both sides of the equation. Godeke & Pomares, 2009, p. 123
It's necessary to engage in a learning process to maximize social impact. While measuring financial returns is easy and standardized today, impact measurement is still a growing industry. Consequently, the different players across the spectrum of capital use many different methods and frameworks. Therefore the adoption of best practices is hindered, while investors and organizations struggle to measure outcomes and learn from them.
Measure What Matters
Players across the supply and demand of capital committed to measure and report the performance (social and environmental). Outcome-level measurement allows strategy alignment and feedback loops to optimize and maximize the returns.
Measurement can take many forms and follow different frameworks and indicators, particularly Impact Management Project 5 Dimensions in alignment with GIIN IRIS+. These frameworks allow investors and organizations to measure what matters. The outcomes are, and who the stakeholders are, how much change has occurred, and contribution and impact risks.
In an ideal situation, investors use this information to understand how much impact they are creating and learn about the effectiveness of their operations and establish feedback loops for improving their processes to maximize social value creation.
Read More: Attribution Vs Contribution
IMPACT INVESTING LANDSCAPING IS CHANGINGFind out key players in impact investing ecosystem and how are they changing
IMPACT INVESTING EXAMPLES
Impact investors can be individuals or various 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 that 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. Like Beneficial State Bank, other banks have created foundations that own 100% of the bank's economic rights and use that profit to make community-related investments.
Another newer actor in 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 United States' pension funds have contributed to impact investment. However, that number is expected to rise dramatically -- 64% say that they plan to do so in the future.
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, impact investors, or design new interventions and seek impact investments themselves.
TYPE OF IMPACT INVESTING
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.
ESG Screening and Sustainable Impact Investing
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 that 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 expectation of the financial returns. Capital is allocated to assets that 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
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 a lack of access to drinking water as one of the greatest threats to humankind and 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 are 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 that haven’t had as much commercial validation but 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 a few examples of impact investing that will give you hope for the system change.
IMPACT INVESTING ECOSYSTEM
There is a major alignment breakthrough required between impact ecosystem layers
Three layers are:
- Asset Owners: Take nonfinancial considerations - like impact - into account when making investment decisions. Build a robust process to manage and measure impact through the use of standard and bespoke indicators.
- Asset Managers: Assess investor contribution and understand portfolio weights on avoiding harm, benefiting stakeholders, or contributing to solutions. Measure investment and portfolio performance and report to asset owners.
- Assets: Enterprises that work on innovating environmental footprint or improve stakeholder outcome
- Impact Advisory: Support impact portfolio construction for every client with a disciplined impact management process. Demonstrate environmental and social impact, in addition to financial returns based on IRIS, GRI, SDG, or other standards.
For a better Impact Capital flow, impact thesis alignment is critical. Impact Cloud® is designed to improve impact data management at each layer. In addition, data pipeline allows to aggregate data between each layer in a trustable manner
IMPACT MEASUREMENT AND MANAGEMENT
GET STARTED WITH THE ONLY
end-to-end impact management platform
Listen to stakeholder's voice and aggregate impact evidence to drive strategy, investment insights, fundraising, reporting and more.
Clarify priorities to capture outcomes, define indicators, risks, and assumptions in a user-friendly environment.
Design a systematic data collection approach both at stakeholder and asset level for improved impact evidence.
Build a portfolio of programs and/or assets. Define profile data for portfolio-level analysis.
KPIs are visualized and updated in the Dashboard. Build multiple dashboards and share with stakeholders.
Build an impact report with drag-and-drop or export visualizations to own report.
Collect data and evaluate organizations’ risk for a smart-resources allocation.
IMPACT INVESTING FUNDS AND RESOURCES
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.
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- How Impact Investors Can Help Foundations Make Better Mission-Related Investments
- Impact Metrics For Gender Lens Investing
- Using Global Standards for a Business' Impact Reporting
- The Global Impact Investing Network (GIIN)
- Guide for Fund Managers
- Getting Started with IRIS metrics
- The Omidyar Network
- Root Capital
- Echoing Green
- Social Capital Markets
- Case Foundation Impact Investing Guide
Making Impact Measurement & Management Actionable
Manage investments with the intent to contribute to the achievement of measurable social and environmental objectives.
Build impact thesis, navigate impact management metrics, manage the investment portfolio and generate insights in the shortest time.
Most flexible, comprehensive and easy to use impact management platform for Asset Owners and Asset Managers for:
- Portfolio Management
- Data collection