Impact investing is the allocation of investments in companies, organizations, and funds to generate social and environmental impact alongside financial returns. Impact investments can be made in developing and developed markets and target various social and environmental issues, including poverty alleviation, climate change, education, and healthcare.
These types of investments come in various forms, each with varying levels of risk and potential returns. Investors should consider the kind of risk they are willing to take and their personal beliefs when considering what kind of impact investments to put their money in.
Some spaces where impact investing is prominent are healthcare, education, and energy, especially renewable energy. There are three main categories of impact investments; debt financing, equity, or mezzanine financing, which involves investors purchasing shares in a company, and direct investments such as buying land for conservation purposes. These represent just a small number of possibilities; there is no one-size-fits-all approach to this style of investing.
Thoughts on Impact Investing
More and more, socially and environmentally responsible practices attract investors, benefiting companies that commit to those practices. Impact investing appeals mainly to younger generations, such as millennials, who want to give back to society; this will likely expand as these investors gain more influence in the market. However, because impact investments are often profitable, they are also attractive for traditional investors looking for ways to make their money work for good without compromising their principles. In 2020, the Global Impact Investing Network released a survey that found more than 88% of impact investors had their financial expectations met or exceeded.
Since the popularity of impact investments has grown, there have been asset management companies, banks, etc., who have tailored funds to meet the demands of socially responsible investors. Another form of investments, called socially responsible investments, or SRIs, are a subset of impact investments. However, the investment focus of SRIs are more narrow, with an affinity towards companies that align with their views of human rights, responsibility to consumers, and environmental protection.
How Impact Investing Works
Generally speaking, impact investors enjoy an ROI that falls just below the average market rates. But, some instances can see impact investments outperform. Recent data from the University of California shows impact investments have a median return rate of 6.4%, which was one percentage point lower than non-impact focused funds. There are a few significant examples of impact investing in the real world. One example is the work that the Gates Foundation does in developing countries. The Foundation’s initiatives are focused on areas like healthcare and education, creating a positive impact on the people who receive the services and having a ripple effect throughout the community.
Another example is Acumen’s work in Africa, focusing on issues centered around clean water and affordable housing, which significantly impact the quality of life for people in poverty-stricken areas. Finally, Kiva is an organization that allows individuals to loan money on their website at 0% interest. The lender receives tokens every month, which hopefully will turn into capital gains when they are sold. While impact investing is helpful to the planet, it differs from philanthropy in that it requires measurable social or environmental impact and profits. Philanthropy is help given with no expectation of any repayment or benefit. Impact investing must positively impact society and make financial gains for investors; it can’t just be money donated with no return.