Wikipedia

Impact investing

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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".[1] At its core, impact investing is about an alignment of an investor's beliefs and values with the allocation of capital to address social and/or environmental issues.

Impact investors actively seek to place capital in businesses, nonprofits, and funds in industries such as renewable energy[2] and education.[3] microfinance,[4] Institutional investors, notably North American and European development finance institutions, pension funds and endowments have played a leading role in the development of impact investing.[5] Under Pope Francis, the Catholic Church saw an increased interest in impact investing.[6]

Impact investing occurs across asset classes; for example, private equity/venture capital, debt, and fixed income. Impact investments can be made in either emerging or developed markets, and depending on the goals of the investors, can "target a range of returns from below-market to above-market rates".[7]

Development

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Historically, regulation—and to a lesser extent, philanthropy—was an attempt to minimize the negative social consequences (unintended consequences, externalities) of business activities.[citation needed] 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.[8]

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.[9] In 2000, Baruch Lev of the NYU's 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.[10]

The term "impact investing" was coined in 2005 by Mark Zapletal of Wartenberg Trust in his presentation "Impact Investing, a Door to Sustainable Philanthropy", at the Global Family Office Summit in New York.[11]

Industry

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As of 2024, the number of funds engaged in impact investing is estimated at 3,907 organizations managing an estimated $1.571 trillion USD in impact assets under management, much smaller than the global equity market ($78 trillion USD).[12][13] A 2024 report from the Global Impact Investing Network (GIIN) estimated that the impact investing industry grew at a 21% compound annual growth rate since 2019.[14] The largest sectors by asset allocation were identified as energy, housing, financial services (including microfinance), and healthcare.[15]

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.[citation needed]

Organizations receiving impact investment capital may be set up legally as a for-profit, not-for profit, benefit corporation, low-profit limited liability company (L3C), community interest company, or other designations that may vary by country. In much of Europe, these are known as "social enterprises".[16]

Institutional impact investing

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Institutional investors

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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,[17] 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.[18]

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.[19] 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.[20]

Impact investing can help organizations become self-sufficient by enabling them to carry out their projects and initiatives without having to rely heavily on donations and state subsidies.

There has been a growing interest in impact investing from faith-based investors, as they seek to align their investments with their core beliefs.[21]

Increased supranational and pension cooperation

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Governments and national and international public institutions including development finance institutions have sought to leverage their impact-oriented policies by encouraging pension funds and other large asset owners to co-invest with them in impact-informed assets and projects, notably in the Global South. World Pensions Council and other US and European experts have welcome this course of action, insisting nonetheless that:

Governments and international institutions need to do more if they truly seek to 'unlock' private sector capital in a meaningful way. They have to ask themselves the following questions: what are the concrete legal, regulatory, financial and fiduciary concerns facing pension fund board members? How can we improve emerging industry standards for impact measurement and help pension trustees steer more long-term capital towards valuable economic endeavors at home and abroad, while, simultaneously, ensuring fair risk-adjusted returns for future pensioners?[5]

Mission investing by foundations

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Mission investments are investments made by foundations and other mission-based organizations to further their philanthropic goals, either with a portion or with the entirety of their endowment.[22] They include any type of investment that is intended and designed to generate both a measurable social or environmental benefit and a financial return. For example, after the Heron Foundation's internal audit of its investments in 2011 uncovered an investment in a private prison that was directly contrary to the foundation's mission, the foundation developed and then began to advocate for a four-part ethical framework to endowment investments conceptualized as Human Capital, Natural Capital, Civic Capital, and Financial Capital.[23]

Foundations that make investments aligned with related philanthropic work include the Bill & Melinda Gates Foundation, Soros Economic Development Fund, and Ford Foundation.[24]

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Program-related investments (PRIs) are investments, usually by foundations, into below-market rate or concessionary investments that are primarily made to achieve charitable or "programmatic" objectives rather than financial objectives. This category includes recoverable grants, below-market-rate loans, R&D or seed stage equity investments (stock), loan guarantees and volume guarantees. For private foundations, PRIs count towards the required 5 percent annual payout.

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Mission-related investments (MRIs) are investments, generally made from endowments, into mission-driven organizations that are expected to generate market-rate financial returns comparable to an ordinary investment of a similar type and risk profile. MRIs are designed to have both a positive social impact and contribute to the endowment's long-term financial stability and growth. Examples of MRIs include loans to mission-aligned non-profit organizations (e.g., charter schools, hospitals or research centers) that are expected to pay back loans with interest, as well as investments in for-profit social impact companies, social impact funds, socially responsible fixed income (bond) funds, impact-oriented private equity funds and public equity portfolios (stocks).[25]

Impact investing by individuals

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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

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Exchange-traded funds like the SPDR Gender Diversity ETF from State Street are publicly traded and hence available to anyone with a stock brokerage account. MSCI offers 11 environmental, social and governance index ETFs, including popular low-carbon and sustainability indexes.[26]

Syndicate or pooled investing

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Groups of angel investors focused on impact, where individuals invest as a syndicate also exist. Examples include Clearly Social Angels in the United Kingdom.[27]

Digital microfinance platforms

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Web-based investing platforms, which offer lower-cost investing services, also exist. 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, allowed retail investors to loan to small businesses in African countries via local intermediaries, though the service permanently closed in 2019. 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".[28]

Impact investing in Asia

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Impact Investing in Asia is a burgeoning sector with many funds currently in play. In South East Asia, from 2007 to 2017, US$904 million impact capital was deployed by Private Impact Investors (PIIs) and US$11.9 million was deployed by Development Finance Institutions (DFIs).[29]

Private equity and venture capital

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Impact investing organizations and funds also make equity investments like traditional private equity and venture capital funds, but only investments with developmental impact.[30][31][32] According to a 2021 study by the Wharton School of the University of Pennsylvania venture capital has been dominating the impact investment space.

Gender lens investing

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Gender lens investing is a subsection of Impact Investing, and refers to investments which are "made into companies, organizations, and funds with the explicit intent to create a positive impact on gender". Investments which promote gender equity and address gender based issues can be made by investing in gender led enterprises, enterprises which promote gender equality through hiring, women in positions of authority, or in their supply chain, as well as supporting services which support, empower and develop capacity of women.[29] Gender lens investing was created in response to the difficulty which woman face in accessing capital, as women globally have less access and higher barriers to obtaining capital.[33]

Female entrepreneurs have routinely struggled to attract capital from male investors. In 2019 Fortune magazine reported that just 2.2% of all venture capital went to female founders. Taken together, all female founders raised less in capital than one e-cigarette manufacturer. Some have gone to great lengths to avoid experiencing gender discrimination. In 2017 the Telegraph reported on the founders of Witchsy who created an imaginary third male founder in order to converse with male investors.[34]

Gender lens investing is growing rapidly. More than 100 funds are open to private investors. In 2018 the number of gender lens assets under management grow by 40% according to analysis by Veris Wealth Partners.[35] Demand is rising with major banks offering gender lens bonds including NAG, Goldman Sachs, Merrill Lynch and many others.

See also

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References

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  1. ^ "2017 Annual Impact Investor Survey" (PDF). The Global Impact Investing Network. Archived from the original (PDF) on 2016-09-02. Retrieved 2017-03-14.
  2. ^ Meng, Tonyu; Newth, Jamie (2021-05-04), "Financing a sustainable planet: research agenda for impact investing in the renewable energy sector from an identity-based view", A Research Agenda for Social Finance, Edward Elgar Publishing, pp. 55–77, doi:10.4337/9781789907964.00010, ISBN 978-1-78990-796-4, retrieved 2025-05-15
  3. ^ Barber, Brad M.; Morse, Adair; Yasuda, Ayako (2021-01-01). "Impact investing". Journal of Financial Economics. 139 (1): 162–185. doi:10.1016/j.jfineco.2020.07.008. ISSN 0304-405X.
  4. ^ Agrawal, Anirudh; and Hockerts, Kai (2021-03-04). "Impact investing: review and research agenda". Journal of Small Business & Entrepreneurship. 33 (2): 153–181. doi:10.1080/08276331.2018.1551457. ISSN 0827-6331.
  5. ^ a b Firzli, M. Nicolas J. (7 July 2017). "G20 Nations Shifting the Trillions: Impact Investing, Green Infrastructure and Inclusive Growth" (PDF). Revue Analyse Financière. Paris. Archived (PDF) from the original on 2 August 2017. Retrieved 7 July 2017.
  6. ^ The Catholic church dabbles with impact investing Some Worry Archived 2017-08-19 at the Wayback Machine, The Economist
  7. ^ "Lessons Learned from Microfinance for the Impact Investing Sector". Impact Investing Policy Collaborative (IIPC). 2013. Archived from the original on 17 December 2013. Retrieved 16 December 2013.
  8. ^ Hayat, Usman (4 November 2012). "Impact investing: making money the charitable way". Financial Times. Archived from the original on 30 June 2015. Retrieved 14 August 2014.
  9. ^ Bugg-Levine, Anthony (2011). Impact Investing: Transforming How We Make Money While Making a Difference (1 ed.). John Wiley & Sons. ISBN 978-0470907214.
  10. ^ "Transcript from Intangible assets by Baruch Lev" (PDF). Archived (PDF) from the original on 2018-03-24. Retrieved 2014-05-02.
  11. ^ Somers, Mark (2023). Family Office Fundamentals - Human Capital Matters: The Principals' Guide to Creating, Staffing and Future-Proofing Your Family Office (1 ed.). Independent Publishing Network. ISBN 978-1803525471.
  12. ^ "What you need to know about impact investing". The GIIN. Retrieved 2025-04-28.
  13. ^ Le, Frederic Dodard;Amy (2024-10-18). "Global Market Portfolio 2024". www.ssga.com. Retrieved 2025-04-28.{{cite web}}: CS1 maint: multiple names: authors list (link)
  14. ^ Xiao, Dean Hand, Maddie Ulanow, Hongyu Pan, Kelly. "Sizing the Impact Investing Market 2024". The GIIN. Retrieved 2025-04-28.{{cite web}}: CS1 maint: multiple names: authors list (link)
  15. ^ Xiao, Dean Hand, Sophia Sunderji, Maddie Ulanow, Renée Remsberg and Kelly. "State of the Market 2024: Trends, Performance and Allocations". The GIIN. Retrieved 2025-04-28.{{cite web}}: CS1 maint: multiple names: authors list (link)
  16. ^ Sherwood, Bob (4 August 2011). "Social enterprise start-ups blossom". Financial Times. Archived from the original on 10 January 2012. Retrieved 8 October 2014.
  17. ^ Financial Advisor Magazine (2 June 2010). "Wealthy Attracted To Impact Investing". NASDAQ. Archived from the original on 16 June 2018. Retrieved 15 December 2013. {{cite web}}: |author= has generic name (help)
  18. ^ Lemke, Lins, Hoenig and Rube, Hedge Funds and Other Private Funds, §6:43 (Thomson West, 2013)
  19. ^ Baird, Ross (1 June 2013). "Bridging the "Pioneer Gap": The Role of Accelerators in Launching High-Impact Enterprises" (PDF). Aspen Institute. Archived from the original (PDF) on 17 April 2016. Retrieved 8 October 2014.
  20. ^ "Unpacking the Impact in Impact Investing". SSIR. Archived from the original on 6 July 2015. Retrieved 14 July 2015.
  21. ^ "Engaging Faith-Based Investors in Impact Investing" (PDF). GIIN. Archived (PDF) from the original on 25 June 2020. Retrieved 12 January 2020.
  22. ^ Berliner, Peter. "About Mission Investing". Mission Investors Exchange. Archived from the original on 29 November 2014. Retrieved 19 November 2014.
  23. ^ "Introduction to Net Contribution". Heron Foundation. Archived from the original on 19 May 2019. Retrieved 19 May 2019.
  24. ^ James Chen (June 13, 2021). "Impact Investing". Archived from the original on June 16, 2018. Retrieved December 28, 2021.
  25. ^ Berliner, Peter; Spruill, Vikki (September 2013). "The Many Forms of Impact Investing". Community Foundation Field Guide to Impact Investing.
  26. ^ Sullivan, Paul (2016-03-04). "In Fledgling Exchange-Traded Fund, Striking a Blow for Women". The New York Times. ISSN 0362-4331. Archived from the original on 2019-09-06. Retrieved 2016-12-17.
  27. ^ Cohen, Norma (2013-03-22). "Making good and doing good". The Financial Times. Archived from the original on 2014-09-29. Retrieved 8 October 2014.
  28. ^ "The Future of Microplace". Microplace. Archived from the original on 6 September 2015. Retrieved 1 October 2015.
  29. ^ a b "The Landscape for impact investing in South East Asia" (PDF). thegiin.org. Archived (PDF) from the original on 2019-01-10. Retrieved 2019-01-10.
  30. ^ Cheney, Catherine (16 August 2018). "How Gates' Strategic Investment Fund gets companies to take on global health". Devex. Archived from the original on 24 October 2019. Retrieved 8 January 2020.
  31. ^ Bade, Scott (28 October 2019). "Omidyar Network CEO opens up about VC-influenced Philanthropy". TechCrunch. Archived from the original on 28 December 2019. Retrieved 8 January 2020.
  32. ^ Heal, Alexandra; Wasley, Andrew (10 December 2019). "World Bank urged to rethink investment in one of Brazil's big beef companies". The Guardian. Archived from the original on 8 January 2020. Retrieved 8 January 2020.
  33. ^ "What is gender lens investing?". Women Effect. 22 December 2016. Archived from the original on 2019-04-14. Retrieved 2019-01-10.
  34. ^ McGoogan, Cara (2018-03-05). "Female entrepreneurs invent male co-founder to avoid sexist discrimination". The Telegraph. ISSN 0307-1235. Archived from the original on 2020-08-10. Retrieved 2020-01-06.
  35. ^ Veris Wealth Partners (Nov 14, 2017). "Gender Lens Investing Assets Rise 41% In Past Year". PR Newswire (Press release). Retrieved 2020-01-06.


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