July 2013 - TriLinc

When many investors first become aware of impact investing, they wonder if it is the same as Socially Responsible Investing. It is not. In this blog post, we seek to uncover the difference between impact investing and socially responsible investing.

So what is the difference between impact investing and socially responsible investing? Impact investing is distinctly different from socially responsible investing in that socially responsible investing typically applies a set of negative or positive screens to a group of publicly listed securities – for example, a mutual fund that avoids investments in tobacco, alcohol and firearms. Impact investing goes beyond a passive screen by actively seeking to invest in companies or projects that have the potential to create positive economic, social and/or environmental. Where socially responsible investing fund managers are generally passive and adopt a “do no harm” approach, impact investing funds typically not only seek to create positive impact, but measure and report their impact in a transparent way.

Beyond the impact investing objective, impact investing also typically targets progress on environmental, social and governance (ESG) matters relevant to a company’s strategy and operations. In impact investing the ESG analysis, which takes into account the effect that a company’s operations has on its market, community and environment, has become more mainstream in recent years, as analyses have determined that it can both drive long-term value and reduce brand and reputational risks. The UN Principles for Responsible Investment (like impact investing), which detail best practices in ESG investing, have been signed by nearly 700 investment managers and over 250 asset owners around the world, including Blackrock, Fidelity, KKR and CALPERS.

It is not enough for impact investing managers to merely intend to make a positive difference – managers and investors must track their social and environmental performance (the impact). In 2009, a group of impact investing stakeholders including investment managers, the Rockefeller Foundation, and the U.S. government, began to create a common set of social and environmental impact metrics that would increase the transparency and credibility of impact reporting. This led to the creation of the IRIS framework, which applies across sectors and geographies to give investors a standardized measure of the non-financial impact of their investments, ranging from average employee wages to metric tons of greenhouse gas offset. With leading impact investing funds and investors utilizing IRIS metrics to track and report their social and environmental results, investors will increasingly be able to compare and benchmark non-financial performance across managers and strategies.

First things first: what is impact investing? Impact Investing is generally defined as investing with the specific objective of achieving both a financial return and a positive economic, social and/or environmental impact. Impact investing has been called “investing with purpose,” since it actively pursues positive social change, but not through philanthropy. Rather, impact investing is about making profit-seeking investments, using traditional debt and equity instruments, which support companies that have the power to change their communities and the world for the better.

Although it has only recently been growing in recognition, impact investing has been in existence in various forms for a long time. Since the 1960s, government-funded development finance institutions such as the World Bank’s private investment arm the International Finance Corporation (IFC), and U.S. Overseas Private Investment Corporation (OPIC), have engaged in a form of impact investing by making primarily private equity and debt investments in developing economies. The IFC, which coined the term “emerging markets” in the early 1980s, has proven that generating impact investing (investing with impact) does not necessarily require sacrificing return, achieving an annual internal rate of return of 18.3% on its investment funds portfolio between 2000 and 2011.

Within the field of impact investing, there is a wide range of investors seeking out different opportunities based on various types of desired impact and financial goals. Impact investing is commonly categorized as either “financial first” or “impact first,” which simply refers to the primary goal of the investment. Impact investing that puts “Impact first” is first and foremost trying to solve a particular economic, social or environmental problem, and are willing to sacrifice some level of financial return to achieve that primary objective.

Other impact investing managers engage in “financial first” impact investing, with the primary goal of delivering competitive financial returns while creating as much impact as possible. While most financial first impact investing focuses on solving a particular economic, social or environmental problem, their investment strategy is likely more traditional with a disciplined, primary focus of generating financial returns. This group of investors, which includes TriLinc Global, tends towards the long-term view that generating returns that are competitive to those of traditional asset classes will likely attract more capital to impact investing, and thus have the scalability to generate a larger, positive impact on society in the long term.

Many reports and articles predict a bright future for the impact investing industry, as investors seek to create something greater than a financial return from their invested assets. Hope Consulting has predicted that there is approximately $120 billion in current demand for such investments, and found that this demand is likely to grow as investors become more comfortable with the emerging asset class. As impact investing develops, an even greater variety of funds targeting the different risk, return and impact profiles of individual investors will likely appear. Over time those most successful at achieving their primary objective will likely emerge as industry leaders and market makers. Other burgeoning efforts, such as those to establish independent ratings systems and standardized metrics, will further standardize measurement and enable comparison across a multitude of factors, all of which will help individual and institutional investors to make decisions that align their money and their desired impact. For the businesses that they fund, and the communities and environments that those businesses improve, the growth of impact investing is a very welcome trend.

Month: July 2013

What is the Difference Between Impact Investing and Socially Responsible Investing?

What is Impact Investing?