Impact investing integrates philanthropy and investing as a promising tool for philanthropists and investors alike. Previously viewed as separate disciplines, philanthropy prioritized social change, while investing prioritized financial gain. Combining the two to deliver a financial return while also doing good seemed unlikely to many, but it is now a reality.
Impact investing has emerged as a solution that seeks to generate social and/or environmental benefits while simultaneously delivering a financial return. The impact investing market is expanding rapidly, with some estimates valuing it at nearly $9 trillion in the U.S. alone.
Key Elements of Impact Investing
When it comes to impact investing, there are four key elements that one must understand. These are intentionality, evidence-based investing, impact management, and contributing to industry growth.
Intentionality is crucial in impact investing. It involves setting goals and creating an action plan that includes companies committed to achieving societal good. These companies must have a clear plan to reach their goals, and impact investors must invest consciously, driven by purpose rather than chance.
Evidence-based investing is another critical element in impact investing. Companies that appear socially and environmentally conscious must prove their social and financial worth to investors through empirical research and data. When making informed decisions, impact investors rely on a data-driven approach rather than preconceived notions or assumptions.
Impact management is a third element that is essential in the impact investing space. Companies often undergo several iterations before producing a final or acceptable product or service. Consistent measurement and evaluation are required to amplify positive results and mitigate unintended or negative consequences.
Contributing to Industry Growth
Finally, contributing to industry growth is another key element of impact investing. While impact investors are motivated by long-term financial gains, there is also a sense of community impact through sharing non-proprietary information. This includes sharing research results or other positive and negative lessons to benefit future investors.
Types of Impact Investments
In terms of the types of impact investments, there are three major categories: education, agriculture, and healthcare.
Education-focused investments typically aim to reduce inequities in teaching and learning outcomes.
In the agriculture sector, investments are made in companies seeking to enhance food security, provide clean water to hard-to-reach areas, or increase food production in climate-affected regions. For instance, agricultural technology can serve a crucial role in providing societal and environmental benefits.
Finally, healthcare is a sector where sustainability is particularly relevant, especially in the context of the global pandemic. Socially responsible healthcare companies work on problems such as pandemic readiness, medication and treatment delivery, and researching emerging diseases. Impact investors can play a critical role in advancing these efforts while achieving financial gains.
Why Impact Investing Matters
Investing for sustainability is a potent tool for generating social good, as it allows for a more extensive range of assets to be leveraged than traditional philanthropy. Private foundations in the U.S. can make a significant social impact not only with the required 5% annual payout but also with the remaining 95% endowment corpus that stays invested. For context, U.S. foundations provide annual grants amounting to $60 billion while holding assets valued at $865 billion.
How Impact Investing Helps Further Impact Goals
Impact investing offers a number of benefits for advancing social good goals:
Leverage Philanthropic Dollars
Investment returns can be reused over and over again to compound the impact, making it a powerful tool for leveraging philanthropic dollars.
Greater Flexibility to Test Innovative Approaches
Investing for sustainable growth offers donors increased freedom and flexibility to explore innovative methods of achieving both financial returns and social impact.
Complement Philanthropic Strategies
Donors can use impact investing to complement their philanthropic strategy, breathing new life into their approach to social change.
Coordination with Sustainable Development Goals
Applying impact investing to specific social causes can attract more capital and novel approaches to address targeted issue areas. Many businesses and nonprofits, along with all the world’s governments, committed to the Sustainable Development Goals (SDGs) in 2016. They’re 15-year global goals that impact investing is increasingly aligning with.
How Impact Investing Helps Further Financial Goals
Impact investing can benefit financial goals as well as social ones:
Strong ESG Practices Can Lead to Financial Outperformance
Many social good projects that embrace strong environmental, social, and governance (ESG) practices may experience financial outperformance.
Streamline Strategy to Achieve Returns with Larger Pools of Money
Combining investment and impact efforts can simplify strategy and aid in achieving financial returns, as well as social impact, with larger pools of capital.
Avoid Making Investments in Opposition to Values
Investors can apply market-based strategies to address the social causes they care about, all while avoiding investments that contradict their values.
How Philanthropy Can Help Advance Impact Investing
Philanthropy plays a critical role in advancing impact investing:
Provide Risk, Early or Patient Capital
Philanthropy can help promote promising investments that may not yet be attractive to pure investment capital due to factors such as high risk, unproven track records, or an uncertain return timeline. In such cases, philanthropy can provide risk capital, early-stage capital, or patient capital.
Measurement of impact is one of the most challenging aspects of impact investing, and philanthropy has been honing this skill for over a century. Impact investors can coordinate with philanthropy to evaluate impact appropriately, measuring it along with the desired financial return.
Develop and Professionalize the Field
Through education, training, research, and infrastructure building, philanthropy can play a crucial role in developing, scaling, and professionalizing the field.
Investing with Values
Many investors are passionate about having their investments reflect their internal values. There is a good feeling that comes with putting money to work in companies that seek to do good for society as a whole.
Risks of Impact Investing
While investing for sustainability can have positive impacts, there are also risks to consider:
Fund managers may use it to market sustainable investments to a broad audience, attracting assets and applying fees.
Before investing, check fees and holdings. Sustainable funds may resemble index funds. Due diligence is important for any investment.
An emerging school of thought views money as a tool for creating positive societal outcomes. While still prioritizing financial returns, impact investors aim to maximize social impact for each dollar invested. This approach recognizes that society’s needs should be considered alongside profits, acknowledging that money should be used for more than just building wealth.