What Is Impact Investing?

Impacting investing aims to generate specific beneficial social or environmental effects in addition to financial gains. Impact investments may take the form of numerous asset classes and may result in many specific outcomes. The point of impact investing is to use money and investment capital for positive social results.

Impact investing refers to an investment strategy that not only generates financial returns but also creates constructive outcomes. The strategy actively seeks to make a positive impact by investing, for example, in nonprofits that benefit the community or in clean-technology enterprises that benefit the environment. Impact investing attracts individuals as well as institutional investors including hedge funds, private foundations, banks, pension funds, and other fund managers.

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What is Impact Investing?

Types of Impact Investments

Impact investments come in many different forms of capital and investment vehicles. Like any other type of investment class, impact investments provide investors with a range of possibilities when it comes to returns. But the most important thing is that these investments offer both a financial return and are in line with the investor's conscience. According to a survey by the Global Impact Investing Network (GIIN), the majority of investors who choose impact investing look for market-rate returns.

The opportunity for impact investments varies and investors may choose to put their money into emerging markets (EM) or developed economies. Impact investments span a number of industries including:

  • Healthcare
  • Education
  • Energy, especially clean and renewable energy
  • Agriculture

An example of an "impact investment" is one that would give back to the community by helping less fortunate groups of people.

How Impact Investing Works

The term impact investing was first coined in 2007, but the practice was developed years earlier. A basic goal of impact investing is to help reduce the negative effects of business activity on the social environment. That's why impact investing may sometimes be considered an extension of philanthropy.

Investors who use impact investing as a strategy consider a company's commitment to corporate social responsibility (CSR), or the sense of duty to positively serve society as a whole, before they become involved with that company. The type of impact that can evolve from impact investing varies based on the industry and the specific company within that industry, but some common examples include giving back to the community by helping the less fortunate or investing in sustainable energy practices to help save our planet.

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. One major venue is microfinance loans, which provide small-business owners in emerging nations with startup or expansion capital. Women are often the beneficiaries of such loans.

Key Takeaways

  • Impact investing refers to an investment strategy that not only generates financial returns but also creates a positive social or environmental impact.
  • Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.

Special Considerations

Because socially and environmentally responsible practices tend to attract impact investors, companies can benefit financially from committing to socially responsible practices, and investors also tend to profit. A 2018 study by GIIN found that more than 90% of impact investors reported that their investments were meeting or surpassing their projections.

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. By engaging in impact investing, individuals or entities essentially state that they support the message and the mission of the company in which they're investing, and they have a stake in the company's welfare. As more people realize the social and financial benefits of impact investing, more companies will engage in social responsibility.

Impact Investing vs. Socially Responsible Investing

Impact investing is a subset of socially responsible investing (SRI). SRI is also referred to as sustainable or socially conscious investing. In some spheres, this kind of strategy is also called green investing. While the definition of socially responsible investing encompasses avoidance of harm, impact investing actively seeks to make a positive impact via its investments.

Investors who practice socially responsible investing tend to believe in and choose companies that subscribe to their views with respect to human rights, environmental protection, and a sense of responsibility to consumers. For example, some investors may choose not to invest in companies that manufacture, distribute, or promote cigarettes because of their overall negative effect on people's health. Many asset management companies, banks, and other investment houses now offer funds specifically tailored to socially responsible investors.