Investors around the world are making impact investments to unleash the power of capital for good. Continue reading to learn about the core characteristics of impact investing, who is making impact investments, the results these investments can achieve, and more. A version of this primer, answering many of the most frequently asked questions about impact investing, is available for download as well. Share it with a friend or on social media.
Impact investments are investments made with the intention to generate positive, measurable 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 on investors' strategic goals.
The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
The practice of impact investing is further defined by the following characteristics.
Note: On April 3, 2019, the GIIN published the Core Characteristics of Impact Investing, which complement this definition and aim to provide even further clarity about how to approach impact investing. View these four tenets that establish baseline expectations for impact investing, here >
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 below-market-rate returns, in line with their strategic objectives. Others pursue market-competitive and market-beating returns, sometimes required by fiduciary responsibility. Most investors surveyed in the GIIN's 2020 Annual Impact Investor Survey 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.
A comprehensive review of available research to date on the financial returns of impact investments are available in the GIIN’s report, GIIN Perspectives: Evidence on the Financial Performance of Impact Investments. The report evaluates over a dozen studies—produced by a wide range of organizations—on the financial performance of investments in three common asset classes in impact investing: private equity, private debt, and real assets, as well as individual investor portfolios allocated across asset classes.
More data on financial returns of impact investments are available in the 2015 Introducing the Impact Investing Benchmark study, which looks at financial performance of private equity and venture capital impact investments, as well as the second report in the financial performance series, published in May 2017, The Financial Performance of Real Assets Impact Investments. Both of the reports were produced in partnership with the global investment advisory firm Cambridge Associates.
These impact investments illustrate the diverse ways that investment capital can be used to generate positive social and/or environmental impact alongside financial returns.
Impact investing is a relatively new term, used to describe investments made across many asset classes, sectors, and regions. In 2019 for the first time, the GIIN developed a rigorous methodology to estimate the total size of the market. Since this inaugural market sizing effort, the GIIN has strengthened its database and methodology to continually improve its approach and on June 11, 2020, the GIIN published the 2020 Annual Impact Investor Survey, which includes an updated market sizing analysis, which estimates the current market size at USD 715 billion.
This analysis examines the supply of capital allocated to impact investing as of the end of 2019, using impact investing AUM as the indicator of market size. The GIIN estimates that over 1,720 organizations manage USD 715 billion in impact investing AUM as of the end of 2019. The market comprises a range of investor types, in terms of characteristics like organization type, headquarters location, and investor size. Learn more about this pivotal market research here: 2020 Annual Impact Investor Survey.
While some investors have been making impact investments for decades, recently there has emerged a new collaborative international effort to accelerate the development of a high- functioning market that supports impact investing. While this market is still relatively new, investors are optimistic overall 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.
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:
Tap into the leading network of like-minded investors and organizations interested in deepening their engagement with the impact investing market.
IRIS+ is the GIIN's catalog of generally-accepted performance metrics.
The Research Center houses the latest information about market activities and trends, performance, practice, and more.
The GIIN offers specialized impact investment training to investors.
If your organization is interested in deepening its engagement with the impact investing market by joining a global community of like-minded peers, please consider GIIN membership. Click here to learn more about membership.