Impact investing is one form of socially responsible investing and serves as a guide for various investment strategies.Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to above market rates, depending upon the circumstances. Impact Investing tends to have roots in either social issues or environmental issues. Impact investors actively seek to place capital in businesses, nonprofits and funds that can harness the positive power of enterprise. Impact investing occurs across asset classes, for example private equity / venture capital, debt, and fixed income.
Impact investors are primarily distinguished by their intention to address social and environmental challenges through their deployment of capital. For example, criteria to evaluate the positive social and/or environmental outcomes of investments are an integrated component of the investment process. In contrast, practitioners of socially responsible investing also include negative (avoidance) criteria as part of their investment decisions
Historically, regulation – and to a lesser extent, philanthropy – was an attempt to minimize the negative social consequences of business activities. But there is a history of individual investors using socially responsible investing to express their values, usually by avoiding investments in specific companies or activities with negative effects. In the 1990s, Jed Emerson advocated the blended value approach, for foundations’ endowments to be invested in alignment with the mission of the foundation, rather than to maximize financial return, which had been the prior accepted strategy.
Simultaneously, approaches such as pollution prevention, corporate social responsibility, and triple bottom line began to measure non-financial effects inside and outside of corporations. In 2000, Baruch Lev of NYU Stern School of Management pulled together thinking about intangible assets in a book by the same name, which furthered thinking about non-financial effects of corporate production.
Finally, around 2007, the term “impact investment” emerged, an approach that deliberately builds intangible assets alongside tangible, financial ones
The number of funds engaged in impact investing has grown quickly in the last five years, and a 2009 report from the Monitor Group, a research firm, estimated the impact investing industry could grow from its present $50 billion or so in assets to $500 billion in assets within the next decade. This capital may be in a range of forms including equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology. Its growth is partly in response to criticism of traditional forms of philanthropy and international development, which have been characterized as unsustainable and driven by the goals – or whims – of the donors.
Many development finance institutions such as the British Commonwealth Development Corporation or Norwegian Norfund can also be considered impact investors, because they allocate a portion of their portfolio to investments that deliver financial as well as social or environmental benefits.
Impact investing is distinguished from crowdfunding sites like Indiegogo or Kickstarter in that impact investments are typically debt or equity investments over USD $1,000 with longer-than-traditional VC payment times, and may not have an “exit strategy” (traditionally an IPO or buyout in the for-profit startup world). Although some social enterprises are nonprofits, impact investing is typically with for-profit, social- or environmental-mission-driven businesses. Impact investing is distinguished from microfinance (such as MYC4) primarily by deal size and secondarily by the investment for equity rather than debt.
Organizations receiving impact investment capital may be set up legally as a for-profit, not-for profit, B Corporation, Low-profit Limited Liability Company, or other designations that may vary by country.
Impact Investment Mechanisms
Impact investments occur across asset classes and investment amounts. Among the best-known mechanism is private equity or venture capital. Impact investments can also be made by individual angel investors. “Social venture capital” or “patient capital” impact investments are structured similarly to those in the rest of the venture capital community. Investors may take an active role mentoring or leading the growth of the company, similar to the way a venture capital firm assists in the growth of an early-stage company. Hedge funds and private equity funds may also pursue impact investing strategies.
Impact investment “accelerators” also exist for seed and growth stage social enterprises. Similar to seed stage accelerators for traditional startups, impact investment accelerators provide smaller amounts of capital than Series A financings or larger impact investment deals. Most Impact Investment Accelerators are non profits, raising grants from donors to pay for business development services. However, commercially orientated accelerators providing investment readiness and capital raising advisory services are emerging. Two examples in Africa are Impact Amplifier (Cape Town, South Africa) and Open Capital Advisors (Nairobi, Kenya).
Some private foundations also make impact investments. See Program-Related Investment for more.
Large Corporations are also emerging as powerful mechanisms for Impact Investing. Companies that seek to create shared value through developing new products / services, or positively impacting their operations, are beginning to employ Impact Investments through their value chain, particularly their supply chain.
Impact Investing for Individuals
Impact investing primarily takes place through mechanisms open to institutional investors. However, there are ways for individuals to participate in providing early stage or growth funding to ventures that blend profit and purpose. These include RSF Social Finance, Calvert Foundation, Mosaic, Microplace and with private impact-focused financial advisors such as HIP Investor. Other opportunities available to individuals include the Institute for Community Economics’ Investor Note, the Calvert Foundation’s Community Reinvestment Note or the Enterprise Community Partners Community Impact Note. Where an account or fund is subject to ERISA (i.e., it holds corporate or Taft-Hartley pension plans), there are legal limitations on the extent to which investment decisions can be based on factors other than maximizing plan participants’ economic returns.
A new class of web-based investing platforms has emerged in recent years, which aims to bring impact investing into the reach of ordinary individuals with average incomes. As equity deals can be prohibitively expensive for small-scale transactions, microfinance loans rather than equity investment are prevalent in these platforms. An early pioneer in bringing impact investing within the reach of individuals of modest income was Microplace, which allows residents of most US states to participate in debt funding to microfinance institutions in developing countries, with interest payouts averaging around 3%. A more recent entry is Zidisha, a US nonprofit which launched the first international person-to-person microfinance lending platform in 2009. Lenders may invest as little as one dollar in Zidisha loans, and negotiate interest (ranging from 0% to 15%) directly with individual loan applicants in developing countries. Kiva may also be considered an impact investing platform for individual lenders. Kiva loans are less risky than Zidisha loans but do not offer interest to lenders.
Impact Investment networks also exist to bring together individuals with an interest in impact investing. Investor networks may have in-person meetings and/or online platforms to facilitate finding suitable investment opportunities. Investor networks may or may not have a pool of funds to invest on behalf of the network. Often, the role of the network is to bring investors and investees together but investor networks vary in the amount of due diligence they do as a network vs. what individual investors do in assessing deals.
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