Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances.
The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, clean technology, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
The practice of impact investing is further defined by the following four core characteristics:
INTENTIONALITY An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing.
INVESTMENT WITH RETURN EXPECTATIONS Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.
RANGE OF RETURN EXPECTATIONS AND ASSET CLASSES Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.
IMPACT MEASUREMENT A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.
Investors’ approaches to impact measurement will vary based on their objectives and capacities, and the choice of what to measure usually reflects investor goals and, consequently, investor intention. In general, components of impact measurement best practices for impact investing include:
- Establishing and stating social and environmental objectives to relevant stakeholders
- Setting performance metrics/targets related to these objectives using standardized metrics wherever possible
- Monitoring and managing the performance of investees against these targets
- Reporting on social and environmental performance to relevant stakeholders
Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.
The impact investing market offers diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns.
Many types of investors are entering the growing impact investing market. Here are a few common investor motivations:
Impact investment has attracted a wide variety of investors, both individual and institutional.
Impact investors have diverse financial return expectations. Some intentionally invest for concessionary returns in order to maximize impact or to catalyze additional investment capital by accepting a riskier position in a deal. Others pursue market-competitive and market-beating returns, some of whom are bound to do so by fiduciary responsibility. Most investors surveyed by the GIIN in 2015 pursue competitive, market-rate returns.
Respondents also report that portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.
Although very few investors report significant risk events in their impact investing portfolios, business model execution and management is by far the most often cited contributor to risk.
In June 2015, to provide more concrete data on the financial returns of impact investments, the GIIN and Cambridge Associates published Introducing the Impact Investing Benchmark, the first comprehensive analysis of the finanical performance of market rate private equity and venture capital impact investing funds.
These impact investments illustrate the diverse ways that investment capital can generate positive social and environmental impact alongside financial returns.
Many impact investors choose to invest through funds whose social, environmental, and financial goals match their own. Managed by the GIIN, ImpactBase is the online global directory where investors go to find impact investment vehicles.
Impact investing is a relatively new term, used to describe investments made across many asset classes, sectors, and regions. As a result, the market size has not yet been fully quantified. However, the aggregate assets noted below indicate that the market is substantial, with significant potential for growth.
Please note, the data featured above is from the 2015 Annual Survey. The latest data is available in the 2016 Annual Impact Investor Survey, and will be updated here, soon.
While some investors have been making impact investments for years or even decades, in recent years there has emerged a new collaborative international effort to foster the development of a high- functioning market that supports impact investing. While this market is still relatively new, investors are overall optimistic about its development and expect increased scale and efficiency in the future.
Impact investors generally recognize broad progress across key indicators of market growth...
... but also acknowledge that some challenges remain.
Governments are increasingly supporting impact investing. Here are some examples of recent national and international government efforts to encourage impact investing:
The UK GOVERNMENT, provides a 30 percent tax relief for social investments, which is anticipated to stimulate as much as GBP 500 million in additional investment over the next five years.
The EUROPEAN UNION created regulation to formally recognize funds that invest 70 percent of investor capital into European social businesses as “European Social Entreprenuership Funds,” enabling these managers to market and fundraise more effectively among impact investors.
The G8 LEADERSHIP in 2013 launched the Social Impact Investing Forum with initiatives in market research, global collaboration via in-person and virtual events, and expert working groups on impact measurement, asset allocation, mission alignment, and international development.
The GIIN builds critical market infrastructure and supports activities, education, and research that help accelerate the development of the impact investing field. Be sure to check out the following resources:
IRIS is the catalog of generally-accepted performance metrics.
ImpactBase is the searchable, online database of impact investment funds and products designed for investors.
The GIIN Career Center is for job openings in impact investing.
The GIIN offers specialized impact investment training to fund managers.
If your organization is interested in deepening its engagement with the impact investment market by joining a global community of like-minded peers, consider GIIN membership. Click here to learn more about membership.