Definition
Impact investing refers to investments made into companies, organizations, or funds with the intention to generate a measurable, beneficial social or environmental impact, alongside a financial return. It aims to bridge the gap between philanthropy and investing by offering investors a chance to gain financially while contributing to positive change. Impact investing can be made in both emerging and developed markets and target a range of returns from below-market to market rate.
Key Takeaways
- Impact investing refers to investments made into businesses, organizations, and funds with the primary goal of generating social and environmental impact, alongside a financial return. This dual benefit makes it different from traditional investing.
- It is a multibillion-dollar market that has attracted significant attention in recent years, from major financial institutions, private equity firms, and philanthropists, providing effective and scalable ways to achieve social and environmental improvements.
- Impact investing measures success not only based on financial returns but also on its social and environmental impact. The effectiveness of an impact investment is evaluated using metrics such as the Social Return on Investment (SROI) and the Environmental, Social, and Governance (ESG) criteria.
Importance
Impact investing is vital in finance as it aims to generate not just financial returns but also constructive societal outcomes.
This type of investing serves as an efficient tool for addressing social and environmental issues while providing a potential source of profit for investors.
It aligns investors’ financial goals with their values by investing in areas like sustainable agriculture, renewable energy, or affordable housing—all sectors that aim to solve global challenges.
Due to its dual-target approach, impact investing contributes to sustainable development goals by promoting positive change without sacrificing financial performance, shaping a more responsible and sustainable financial system.
Explanation
Impact investing refers to the act of making investments into companies, organizations, and funds with the intent to generate a measurable, beneficial social or environmental impact alongside a financial return. It’s a powerful tool that combines the intention to bring about change with the ability to tap into the market’s forces, using the power of enterprise to address social and environmental issues.
It is a method of investing where social and environmental outcomes are given the same importance as financial returns. Its purpose is to use investments as an alternative approach towards solving societal and environmental issues.
Essentially, impact investing aims to create a sustainable world by combating social and environmental challenges, while also providing a financial return for investors. Industries catered by impact investors are not restricted and can range from healthcare, education, clean energy to sustainable agriculture and more.
The funds generated from impact investing can be used to startup, expand, or support initiatives and programmes that have a positive, long-lasting impact on society and the environment.
Examples of Impact Investing
Green Bond Investments: Many corporations and governments are issuing green bonds to fund projects that have positive environmental effects or climate benefits. For instance, Apple Inc issued a $
5 billion green bond in 2016 that aims to finance clean energy and energy efficiency projects at its facilities. This is a form of impact investing as investors are not just seeking a financial return, but also a measurable environmental impact.
Affordable Housing Funds: Community Investment Corporation in Chicago established an affordable housing loan fund which provides low-cost, flexible financing to rehab and preserve affordable rental housing. This is an example of impact investing, as the goal is to generate financial returns while also tackling the urban housing crisis and revitalization of neighborhoods.
Education Technology Start-ups: Investments in education technology startups like Khan Academy and Coursera who aims to provide accessible and affordable education worldwide. This is impact investing as it’s done with the intention of providing affordable education thus creating social impact, alongside a financial return.
FAQ for Impact Investing
What is Impact Investing?
Impact investing is the investment strategy where an investor chooses to invest in companies, organizations, or funds with the aim to generate a measurable, beneficial social or environmental impact alongside a financial return.
What makes Impact Investing different?
Impact investing differentiate from other investing strategies because it puts equally emphasis on positive social or environment outcomes and the achievement of financial return.
Who can be an Impact Investor?
Any individual or institution such as banks, pension funds, endowments, philanthropists, and retail investors who seek to create positive social or environmental results can be an impact investor.
What are the risks and returns in Impact Investing?
Like traditional investment, Impact investing comes with its own set of risks and returns which can vary widely depending on the specific investment. Investors may face risk factors such as market risk, specific project risk, or policy and regulatory risk. Returns can range from below-market to market-rate, based on the investors’ strategic goals.
How to get started with Impact Investing?
To get started with impact investing, begin by identifying your investment goals, define the impact you want to make, research potential investment opportunities that align with your goals and consult with a financial advisor or impact investing platforms to guide you through the process.
Related Entrepreneurship Terms
- Socially Responsible Investing (SRI)
- Environmental, Social, and Governance (ESG) Investing
- Investment Screening
- Community Investing
- Sustainable Investing
