An increasing number of people is considering societal and environmental issues as a priority and this has consequences also in terms of their investment choices. This leads to a greater importance of the socially responsible investment field, that comprises the broad category of impact investments.
But what is impact investing and how does it affect the markets? The aim of this article is to answer that question and broaden the knowledge of this topic of growing importance.
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
Impact investments are made both in emerging and developed markets and pursues the objective to improve the conditions of communities and environment all over the world.
The name was invented eleven years ago, even though the practice existed before. It was invented at the Rockefeller Foundation Bellagio Center in Italy and since than it has spread all over the world, pushing more and more people to adhere to the practice.
The GIIN (Global Impact Investing Network) was created. It is the global champion on impact investing, that seeks to increase its scale and effectiveness around the world, by convening impact investors to facilitate knowledge exchange, highlighting innovative investment approaches, building the evidence base for the industry, and producing valuable tools and resources.
The GIIN’s work currently embraces the following focus areas to provide investors with:
- Industry networks and events
- Tools & Resources for Impact Measurement & Management (IMM)
- Transparency into the landscape of impact investing funds
- Training programs for impact investors and fund managers
- Industry research, market data, and publications
- Market leadership initiatives
Four main characteristics are individuated by GIIN to define precisely the term.
First of all, intentionality. The impact investment market provides capital to address the most actual challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
Second, return expectations. Impact investing does not differentiate from traditional investments in terms of return objectives. The important thing here is to note that impact investing does not ignore the issue of financial returns, but contrarily, as stated below, generates positive returns in general.
The third characteristic is the range of return expectations and asset classes. There are diverse ranges of returns required, depending on the investor strategy and perspective, that range from below market rate to above market rate. Moreover, investments can be made across different asset classes such as cash equivalents, fixed income, venture capital, and private equity.
Lastly, impact measurement is essential to monitor the progress of the investment, thus assuring transparency and accountability. Measuring social and environmental impact is not easy, but it is generally achieved through four steps: establishing objectives, setting standards, metrics and targets using standardized indicators, monitoring these indicators and reporting to relevant stakeholders.
Impact investment has attracted a wide variety of investors, both individual and institutional.
To provide some examples: fund managers, financial advisors and wealth managers, development finance institutions, diversified financial institutions/banks, private foundations, pension funds and insurance companies, family foundations, individual investors, NGOs, governments, religious institutions, socially conscious financial service companies, web-based investment platforms.
Impact investing includes many different forms of capital and investment vehicles. The bulk of impact investing is done by institutional investors, but a range of socially conscious financial service companies, web-based investment platforms and investor networks now offer individuals an opportunity to participate in it.
Impact investing appeals largely to younger generations, such as millennials, who want to give back to society, so this trend is likely to expand as these investors gain more influence in the market.
Moreover, also high net worth individuals engage in these practices. Examples are Bill Gates, Mark Zuckerberg, Steve Ballmer, Michael Dell, Pierre Omidyar, Ray Dalio, Paul Allen and Laurene Powell Jobs.
Impact investing is done in different ways. It requires investors to consider a company’s corporate social responsibility (CSR) strategy or the sense of duty to positively serve society as a whole. This societal impact differs depending on the industry and on the specific company. Some common examples include giving back to the community by helping the less fortunate or investing in sustainable energy practices. One major practice is microfinance loans, which can provide small-business owners in emerging nations with capital. Women are often the beneficiaries of such loans.
What about financial returns?
Impact investors have diverse financial return expectations. Some intentionally invest for below-market-rate returns. Others pursue market-competitive and market-beating returns.
A 2018 study by the Global Impact Investing Network (GIIN) found that over 90% of impact investors reported that their investments were meeting or surpassing their projections.
Also at Bocconi University this kind of investment is highly considered. Impact Investing Lab is a platform, acting as a point of reference at national and international level, to support the development of Impact Investing as a new asset class able to attract public and private capital. Its mission is to generate knowledge, share experiences and bridge investors, entrepreneurs and policy makers, in order to develop new markets and businesses with social impact.
One thing is generally recognized. Impact investing is growing. The Global Impact Investing Network recently estimated that there are $228 billion invested in impact, double the prior year estimate.
As more people realize the social and financial benefits of impact investing, more companies will engage in social responsibility. Impact investing challenges the view that social and environmental issues should be addressed by philanthropic donations, and that financial returns should be pursued only through traditional market investments. Impact investing offers diverse opportunities for investors to advance social and environmental solutions through investments that also produce financial returns and that’s why it is considered as the unexpected link and fusion between philanthropy and finance.