Seven Attributes of Impact Investing
Impact investing is a strategy that intentionally aims to generate both a financial return and positive social and/or environmental impact that is actively measured. It is a lens through which investors consider investment options across asset classes, and a process by which investment managers conduct due diligence, monitor, evaluate and report on investments. In an attempt to add clarity to the concept of Impact Investing, we’ve identified seven key attributes below:
Impact investing actively pursues positive societal change using the capital markets rather than philanthropy.
Because impact investments are made with the specific intent to achieve social or environmental goods, the impact investment manager has the responsibility to actively measure and monitor the impact of its investments and report findings to investors.
Impact investing returns fall along the spectrum of concessionary or below market rate returns, market rate returns and premium returns. Impact investing is commonly categorized as either “financial first” or “impact first,” based on the primary goal of the investment. Financial first investors target market rate or premium returns, while impact first investors prioritize social or environmental outcomes over financial results.
Impact investing does not conflict with fiduciary responsibility if it avoids trade-offs between impact outcomes and financial performance. Furthermore, it may contribute to portfolio quality through risk mitigation and long-term value creation.
Although there are similarities between Socially Responsible Investing (SRI) and Impact Investing, there are also some important differences. SRI has traditionally employed negative screens to select companies whose activities “do no harm,” and many SRI investors engage in shareholder activism to change corporate behavior perceived as detrimental to society. As SRI has evolved, it may also incorporate positive screens to identify companies whose activities produce beneficial social and/or environmental outcomes. Increasingly, SRI investors also seek to integrate environmental, social, and governance (ESG) issues into their investment analysis, decision-making, and asset management process.
Complementary to SRI, Impact Investing builds on the fundamentals of exclusionary, positive and ESG screens to deploy capital in profitable companies that intentionally identify and seek positive social and/or environmental benefits, and that commit to actively measuring, reporting and improving impact performance over time.
The impact investing ecosystem comprises capital providers, impact investing funds, social entrepreneurs, companies committed to social and environmental progress, intermediaries, advocacy and capacity development groups and government entities. Each plays a vital role to develop and scale the industry.
Impact investing is an established and expanding strategy in the global capital markets, driven by investor disillusion over the global financial crisis, unmet needs and the Next Generation’s expectations regarding the role of business in society. The Great Recession has highlighted the risks of financial returns without social value. As the world population continues to grow exponentially, there is increasing demand for land, energy, food, water, health care, education and housing, as well as non-essential consumer goods. Accompanying this phenomenon, $41 trillion is expected to transfer from Baby Boomers to more socially-conscious Millennials, who are the next investors, job seekers and consumers. This emerging generation has signaled that it expects companies to improve society in addition to generating profits