As defined by the Global Impact Investing Network (GIIN), impact investments are “investments made into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return”.
“The growing impact investment market provides capital to support solutions to the world’s most pressing challenges in sectors such as sustainable agriculture, affordable housing, affordable and accessible healthcare, education, clean technologies and financial services, among many others.
Impact investments can be made in both emerging and developed markets, and target a range of returns from below market, to market rate.”
The four key characteristics of an impact investor as summarized by GIIN are as follows:
Intentionality – The intent of the investor to generate social and/or environmental impact through investments is an essential component of impact investing.
“These investments are made into enterprises and funds that expand access to critical goods and services, and/or generate positive impact through their operations. For example, investors may seek to use investments to increase access to financial services, education, healthcare, affordable housing or quality employment by underserved populations. Investors may also invest in solutions aimed at mitigating the negative effects of climate change and environmental degradation. Investor activities may be focused in developed or emerging markets, or both.”
Investment with return expectations – Impact investments are expected to generate a financial return on capital and, at a minimum, a return of capital.
“Grants are not expected to return capital and therefore are not impact investments. Grants however can play an important role in enabling impact investing – for instance, through incubating early-stage business models, providing certain forms of credit enhancement, providing technical assistance, or funding needed research and development.”
Range of return expectations and asset classes – Impact investments generate returns that range from below market (sometimes called concessionary) to risk-adjusted market rate.
“Impact investments can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital and private equity. Impact investors may also earn fees through the provision of catalytic instruments such as guarantees. Investors’ return expectations and the instrument(s) in which they invest reflect their intent and are typically driven by the economics of the investment. For instance, some may wish to support higher risk early-stage social enterprises in challenging markets or invest pursuant to various regulatory mandates, often with concessionary returns; others may choose to finance the expansion of proven business models to reach scale or invest in credit enhanced transactions, in the expectation of market or near market rate returns.”
Impact measurement – Commitment to measure and report the social and environmental performance and progress of underlying investments in order to ensure transparency and accountability.
“Investors’ approaches to impact measurement will vary based on their objectives and capacities, and the choice of what to measure usually reflects investor goals and, consequently, investor intention. In general, components of impact measurement best practices for impact investing include:
– Establishing and stating social and environmental objectives to relevant stakeholders
– Setting performance metrics/targets related to these objectives using standardized metrics wherever possible
– Monitoring and managing the performance of investees against these targets
– Reporting on social and environmental performance to relevant stakeholders”
What Impact Investing is NOT
- A grant making charity
- A supplementary Corporate Social Responsibility (CSR) marketing exercise, unless it explicitly pursues the achievement of social or environmental impacts;
- Mission-related investments (or sustainable investments) which incorporate environmental, social and corporate governance (ESG) criteria into investment analysis and portfolio construction across a range of asset classes and yet do not have an intention to pursue a social or environmental value explicitly.