What is an Impact Investment?
(Content provided from the United Nations Development Programme)
Investments made into companies, organizations, and funds with the intention to generate a measurable social and environmental impact alongside a financial return (
GIIN).
How does it work?
Impact investment is
described (and differentiated from other forms of investment) by three guiding principles:
- The expectation of a financial return: impact investors expect to earn a financial return on the capital invested, below the prevailing market rate, at the market rate or even above it.
- The intention to tackle social or environmental challenges (i.e. the impact or intentionality): in addition to a financial return, impact investors aim to achieve a positive impact on society and/or the environment.
- A commitment to measuring and reporting against the intended social and environmental impact: impact investors commit to measure performance using standardized metrics.
Impact investors have traditionally challenged the view that development is to be reached and guided only by social assistance or philanthropy. On the contrary, the implied theory predicts that business and investment are important drivers for achieving more inclusive and sustainable societies. Therefore, impact investors aim to demonstrate that investment can achieve both a positive (social or environmental) impact and a financial return (or, at minimum, a return of capital).
Impact investment is not limited to a specific asset class or sector: it includes, for example, fixed income, venture capital, private equity and
social and development impact bonds. Private equity and private debt are the most common products adopted, with the latter taking the largest share in value terms. Impact investors often–but not exclusively–invest in innovative businesses and enterprises in sectors such as sustainable agriculture, affordable housing, healthcare, energy, clean technology, and financial services for the poor.
A few examples:
- A fund investing in microfinance in Africa and Asia.
- A non-profit financial institution providing finance to farmers in Latin America.
- A platform that allows individual investors to make loans to women in developing markets to access clean energy.
- A foundation endowment’s investment policy focusing on sustainable food.
- An individual investment in a company that provides healthy and nutritious school lunches.
Impact investors include endowments, high net worth individuals, foundations (e.g.
Bill & Melinda Gates Foundation,
Gatsby Charitable Foundation), pension funds, institutional investors (e.g.
JP Morgan,
South Africa PIC) and retail investors that invest capital directly in social enterprises or in impact investment funds (e.g.
Acumen Fund,
Bridges Ventures,
Elevar Equity,
Ariya Capital) and instruments (e.g.
Social Impact Bonds). Impact capital has been raised mostly from banks, pension funds, and
Development Finance Institutions (DFIs).
In terms of investees (receivers of the capital), impact investment can be directed both to for-profit and non-profit ventures, as long as they can produce a financial return. A number of intermediaries can connect impact investors with these impact-driven enterprises with tailored services, such as research, fundraising, certification, evaluation and impact measurement, business incubation, business acceleration and legal services.
Enablers, such as DFIs and the government, provide the enabling environment in which the market transactions can materialize, and, in certain instances, direct incentives and co-financing. An example of supportive legislation is the possibility to register
benefit corporations (B-corporations) in the
US. This form of incorporation allows a business to balance its fiduciary duties between its shareholders and stakeholders legally. B-corporations can also be privately
certified in addition to the legal registration. Moreover, it is expected that the financial market will establish benchmarks for impact investment based on previous attempts to develop
Environmental, Social and Governance (ESG) market indices, e.g. the
S&P Environmental & Socially Responsible Indices, which tracks companies that meet certain environmental and social sustainability criteria, or the
MSCI Low Carbon Indices, which focuses on low carbon businesses. DFIs (e.g. the
International Finance Corporation, the
African Development Bank, and the
European Investment Bank) have spearheaded the movement, developed performance standards and often have interacted with impact investors through blended finance and risk-sharing formulas.
Learn More >>
