What Is Impact Investing?

New information about impact investing is constantly popping up. To get our heads wrapped around the buzz, today’s post explores the basic ins and outs of impact investing. First, we’ll look at the purpose of impact investing and how it differs from socially responsible investing. Next, we’ll consider the impact, or whom and how it helps. Lastly, we’ll review some of the organizations involved and where to get in on the action.

PURPOSE

Impact investments are one of the fastest growing segments of the Environmental, Social, and Governance (“ESG”) sector. They are purpose-driven investments that intend to generate both financial performance and social impact. Rather than relying on government alone or philanthropy alone, impact investments access the capital markets system to make investments that provide a double bottom line return, including competitive financial performance and the opportunity to create social or environmental benefits.

Similar to impact investments, socially responsible investments follow values-based or mission-aligned investment protocols. Examples of socially responsible businesses include Ben & Jerry’s or Patagonia. Both investments intend for sustainability, but purpose-driven investments also intend for impact.

IMPACT

The impact of impact investing relates to strategy, transformation, and measurement. Impact strategies range from solving some of the world’s biggest problems to improving business models. Society is directly impacted through newly created opportunities and improved quality of life. Businesses benefit from improved models, processes, productivity, and profits. Investor’s benefit economically through financial performance, and philanthropically by creating conditions that might not otherwise be available.

Impact investing transforms how we can make money through newly designed frameworks for decision-making, policy design and analysis, and business models. Uber, for example, shook up the taxi industry by reducing costs and increasing availability for consumers in need of transportation. In another business example, Airbnb impacted the hospitality industry by swaying demand from hotel rooms using peer-to-peer exchange services.

Impact also denotes measurable outcomes. Methods to measure environmental, social, or governance initiatives may vary from investment to investment. Ultimately, the overarching focus is a tangible effect on people, planet, or policy.

ORGANIZATIONS

Some of the world’s leading foundations and organizations are working to break down barriers and get capital flowing in new ways. For example, the Ford Foundation works to challenge income inequality, the Calvert Foundation supports Vested.org and works to connect investors to the impact investments they care about, and the Rockefeller Foundation coined the term "impact investing" and supports the Global Impact Investing Network (GIIN). 

Many organizations and social entrepreneurs are emerging to contribute as well. Organizations that work to advance sustainable solutions include Big Path Capital, an impact adviser for investment banking, private equity, and M&A transactions, and Big Society Capital, a U.K. finance institution that supports social sector entities. At Main Research, we develop data-driven impact investment strategies for focused initiatives and investing solutions. ImpactAssets is a nonprofit organization that drives capital toward impact investments for investors who seek positive social, financial, and environmental returns.

Overall, impact investing is a purpose-driven investment that actively pursues positive impact, while socially responsible investing aligns with values-based investment protocol. Both are rapidly growing segments in finance today. As more entrepreneurs, companies and foundations emerge, we see impact investing as the opportunity of our lifetime to transform society, business, and how we make money.