What is Impact Investing?
What is Impact Investing?
Impact investing is a way to make money and make the world a better place. There are many different definitions of impact investing, but the basic idea is that it isn’t just about high financial returns from companies they invest in – those investments also have to have some positive social or environmental impact as well.
Impact investments bring capital towards social issues and environmental issues. Impact investing can occur across asset classes; for example private equity/venture capital, debt, and fixed income. Impact investing can be made in either developed markets or emerging sectors and can target a range of returns from below-market to above-market rates.
Types of Impact Investments
Impact investment is investments in companies organizations and funds with the aim of gaining measurable social and environmental impact with a financial return. These investments can be classified into two categories: missions-related investments (MRI) and programs-related investments (PRI).
PRIs are investments that advance the Foundation’s program objectives but unlike grants, they also seek money for generating financial returns with tolerance for lower-end returns. Financial instruments in this category include bonds and deposits, loans and mezzanine capital, public equity, and private equity.
Copy trading and social trading are innovative investment strategies that have become increasingly popular in recent years, particularly in the realm of impact investing. Copy trading involves mimicking the investment strategies of successful traders, allowing inexperienced investors to take advantage of the expertise of others. Social trading, on the other hand, involves sharing information and resources with other investors in a collaborative manner, allowing for the pooling of ideas and expertise. Copy trading and social trading have proven particularly beneficial in the realm of impact investing, where investors seek to make a positive social or environmental impact through their investments. By copying or collaborating with successful impact investors, inexperienced investors can more easily identify impactful investment opportunities and achieve better returns. The ability to learn and share information through these trading strategies has democratized impact investing, making it more accessible to a wider range of investors regardless of their experience or wealth.
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Is impact investment generational?
No. Anyone, anywhere can do it. But because of when we are in time, impact investing has been picked up by younger generations, such as millennials and Gen Z, as a way to create a better future. After all, they are about to inherit whatever future we have left after all of the Baby Boomers are gone.
As more people are aware of the economic impact of investing as a business model and as corporations become more socially accountable. One study published by the Global Impact Investment Network found over 96% of impact investors are meeting or even exceeding their monetary expectations. The trend is likely to grow as these investor gains have more influence on the market.
Post-pandemic, expect this trend to expand exponentially as more companies commit to social responsibilities. In fact, over 80% of impact investment analysts report that their impact investments have met financial goals or exceeded their targets.
Impact investing vs. socially responsible investing (SRI)
Impact Investment is a Form of SRI also called sustainable re-investment. SRI Investors tend to choose companies that follow their views on human rights, environmental protection, and responsibility towards consumers. They often focus on the company’s policies rather than assessing their social or environmental impact.
In addition, Socially Responsible Investing is different from impact investing in that SRI usually requires a full divestment from any stocks involved with the firearms, alcohol, and tobacco industries. In contrast, impact investors believe that there are many opportunities to make a social difference by investing in companies that allow them to assess and modify the social and environmental impact of their investments.
Socially responsible investors may choose to invest based on a variety of criteria: specifically exclusionary (avoiding certain businesses such as tobacco, armaments, and pornography); and negative screening (avoiding industries such as gambling or nuclear power).
Positive screening (seeking out specific industries such as renewable energy); shareholder engagement (persuading companies to behave in a more socially responsible way through active shareholding and voting); community investing (making loans or investments into the local economy); or faith-based criteria.
Human Rights Impact Investing is a type of impact investment that seeks to align capital with values at the intersection of human rights and finance, which identifies opportunities to generate positive social impact alongside competitive financial returns.
The market has grown rapidly in recent years. According to the Global Impact Investment Network (GIIN) annual report, new institutions like Ford and reinvented institutions like Goldman Sachs are getting involved in this type of investment. The number of institutions invested in impact investment grew from 77 in 2011 to 162 in 2016. Post Covid-19, those numbers are expected to skyrocket.
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Social Impact Investing Ventures Changing the World Through Finance
The industry of social impact investments grows rapidly. In 2012 the Forum for Sustainable and Responsible Investments reported was $3.3 trillion holding of US funds by 443 institutional investors and 272 money managers. Since 1990 the MSCI KLD 400 Social Index Fund has outperformed the S&P 500 in an annualized performance of 10.14% versus 9.69% for the S&P. A new report finds that 72 percent of firms in the study show higher profit and lower volatility than they previously reported. This is important to note as where there is low volatility & growth in a particular sector, money tends to come in huge amounts.
There are many benefits for corporations that align their values with the impacts they have on society. One way companies can do this is by choosing a mission-based business model, which will in turn create social good for its consumers and help the planet. Many forward-thinking businesses today are transitioning to be conscious of what they give back to society alongside focusing on generating profits for shareholders.
Impacts and lessons
When impact investments began, the industry was focused on tackling environmental issues, but it has since expanded to focus on other social issues such as education, health care, and workforce development. For many impact investors, their approach is a “triple bottom line,” in which financial returns are just one of the areas that are considered when deciding whether to invest in a company.
Future opportunities for impact investors include loans to small businesses in distressed areas and clean energy micro-grids in developing countries.
The city of Austin, Texas is currently powered by 100% renewable energy. This came about due to the need for affordable green power for an ever-increasing set of local tech companies.
Renewable energy prices are now on par with natural gas & coal, making them more attractive to business owners.
In Florida, there is a social impact investment made into affordable housing for people living below the poverty line. Since 2016, this has led to 240 homes being built and 244 permanent jobs created.
In Texas, after Hurricane Harvey hit the city of Houston many volunteers came together to help clean up the mess left by flooding caused by heavy rainfall in August 2017.
On the other hand, negative impact investments currently include:
Palm oil plantations in Indonesia for their deforestation of rainforest land that threatens a number of endangered species there.
It also includes recreational fishing which is causing issues with the depletion of fish stock.
Community Reinvestment Fund USA
The United States Community Reinvestment Fund was set up in Minneapolis Minnesota in 1988. The Institute supports local areas to create healthy housing and job opportunities. This is done through a focus on affordable housing, sustainable communities & financial services to support the needs of lower-income households.
BlueOrchard Finance S.A.
BlueOrchard Finance operates in over 80 markets around the world. It focuses on addressing starvation and poverty while boosting entrepreneurship, creating food production and education programs, and working on climate change issues. The company currently has approximately 3.5 billion in assets in management.
Reinvestment Fund is a nonprofit community development financial institution. It currently operates on approximately $1.2B in assets. This fund funds housing and healthcare services, educational programs, and jobs. The agency works primarily by supporting distressed areas and communities in the US.
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The History Impact Investing
The first noted impact investing fund was created in the early 1980s by Arnold Hiatt, who had previously served as president of Stride Rite Corp. He created Horizon Impact Investors Inc., which aimed to do well through investing ethically while also doing good in distressed communities.
The early challenges of impact investing were highlighted by The Rockefeller Foundation’s “Scaling Impact Investing: An Agenda for Collective Action” report in 2013. The report noted that despite an increase in interest and activity, the industry was still young and there were not enough examples to adequately demonstrate what impact investing could achieve.
Impact Investment in Ancient Egypt
Throughout history, there have been multiple examples of socially conscious investing:
The first recorded example was by King Cotton in Ancient Egypt who diversified his business and invested his revenue into building homes for the poor.
Copernicus made loans from his savings that helped to pay for a Polish army to fight the Teutonic Knights in 1519.
In the early 20th century the Rockefeller family was well known for investing money in impact investing. This led to them creating foundations and charities that helped millions of people improve their lives and work towards social justice.
The Bottom Line: Some challenges to this form of investment have been highlighted by reports such as The Rockefeller Foundation’s “Scaling Impact Investing: An Agenda for Collective Action” report in 2013. Some of these include a lack of high-quality examples and the need for more diverse impact investors. Despite this, impact investing appears to be growing rapidly throughout the world with strong support from governments, businesses, and other organizations.
Triodos Investment Management
More than 100 financial services companies manage Triodos investment management. At present the agency has over five billion in investments in its accounts. Primary areas of interest include renewable energy, sustainable food and agriculture (including organic agriculture), healthcare, and education. Its investments extend from North Africa to Europe, Asia, Africa, and India. The bank belongs to the Global Impact Investing Network. The network is set up in America with offices throughout India, South Africa, and South America.
Vital Capital Fund
The Vital Capital Fund is a private equity fund with approximately $350 million in assets. This funds investment is focused on developing sectors i.e. sub-Saharan Africa in business aimed at improving its citizens’ quality of life. The fund’s main investment focus was developed for education, housing, and agroindustrial projects renewable energy, healthcare facilities, and housing. These funds include Luanda Medical Center in Angola and Waterhealth International established in 2008. Among the funds’ investments are the.
Amplify Capital Fund II ($250k | Equity — a limited- -partnership investment) Invests in mission-driven technology and startup companies that help solve disparate healthcare needs. Copower: green loans ($750k | 750k debt securities | Green bonds) New investment launched in September 2018 investment platform provides loans to clean energy infrastructure projects generating financial returns and measurable climate outcomes. Evergreen Future Cities Centre (primary) & Learning Conving space to provide multi-sectoral collaborations to improve the sustainability of the city. It is the first indigenous-operated and owned impact investing intermediary to identify and address the Equity Gap in Indigenous entrepreneurs.
The Bottom Line on Impact Investments
Impact investing is a relatively new and growing way to invest money while also making a positive change in the world. There are both for-profit and nonprofit impact investments, with examples including sustainable energy, community building, and health care access.
It’s not just for rich people, anyone can invest ethically, with initiatives like micro-loans, crowdsourcing, and crowdfunding that give investors the chance to put money into many projects.
Impact investments are as diverse as the people who create them and they come from all over the globe. Impact investors use their money and other resources responsibly because they want to see real change happen in our society and make the world better.
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Caveats and Disclaimers
When looking for a venture capital fund with social and environmental innovation, it is possible to run into early-stage companies with an unproven financial performance in venture capital fund investing. Or perhaps they exhibit limited environmental benefits or social and environmental objectives. The impact investing market is growing very quickly and development finance institutions are rushing to get on board with environmental impact, to build a track record. So beware. Do your homework because the impact investing industry is like any other investment. Questionable practices can come with social and environmental performance funds as well.
Any reference to affordable housing, equity, enterprises, market rate, emerging, program-related, financial health, agency, impact, global, community, returns, pension, renewal partners, hedge funds, not-for-profit, outcomes, patient, innovation, venture, faith-based, management, underserved, guarantees, gender or equivalents is hereby meant for informational purposes only and not to be construed as financial advice. Thanks for reading.
Terms and Definitions
- Global Community: A global community is a network of people that spans different countries, cultures, and backgrounds who are connected and share common interests. It can be an online forum or physical organization that unites individuals from around the world to collaborate, share ideas, and work together to promote social and economic justice.
- Market Rate Returns for Profit: Market rate returns for profit refer to the average level of return on investments that investors expect in exchange for their capital. These returns are generally calculated by taking into account the current market rate as well as factors such as inflation, risk tolerance, interest rates, and other macroeconomic variables. The goal of investing with a market rate return is to maximize profits while minimizing risk.
- Pension Funds: Pension funds are financial instruments used by organizations and individuals to fund retirement benefits for employees. They typically consist of contributions from employers paid into a pool of investments that generate returns over time in order to provide secure retirement income after workers have retired. Pension funds may be managed internally by an organization or outsourced to an external advisor or fiduciary manager who will oversee the investment decisions taken with the fund’s assets.
- Renewal Funds: Renewal funds are pools of money set aside specifically for reinvestment in existing businesses rather than starting new ones; they provide capital for companies looking to expand their operations or reach new markets. Renewal funds can also be used to purchase new equipment or develop innovative products and services. They are commonly supported by government grants and private investment initiatives aiming to stimulate economic growth in local communities through job creation, diversification of industry sectors, fostering entrepreneurship, etc.
- Corporate Partners: Corporate partners are organizations that enter into mutually beneficial agreements with other companies in order to build strategic relationships, acquire resources (e.g., knowledge or capital), extend product/service offerings beyond their own capabilities, gain access to new markets, etc.. Companies need not be competitors in order to enter into corporate partnerships; such collaborations usually involve exchanging resources (tangible or otherwise) so both parties benefit from the arrangement equally.
- Hedge Funds: Hedge funds are alternative investments aimed at generating higher returns than traditional investments through leveraging strategies such as short-selling stocks and using complex derivatives contracts. They tend to be unregulated entities that cater only to high-net-worth individuals due to their low liquidity levels and complexity associated with them; hedge funds have become increasingly popular among investors looking for high-yield alternatives due their ability to generate higher returns than other market indexes over time despite large swings in performance across periods occurring more often than not.
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Research & Curation
Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for SMEs and Investment professionals focusing on ESG principles. Their primary goal is to help middle-market companies automate Impact Reporting with ESG Software. Leveraging the power of AI, machine learning, and AWS to transition to a sustainable business model. Serving clients in the United States, Canada, UK, Europe, and the global community. If you want to get started, don’t forget to Get the Checklist! ✅