What is impact investing?
Impact investments are investments made into companies, organizations, and funds with the intention to generate 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 market rate, depending on investors' strategic goals.
The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
Core characteristics of impact investingThe practice of impact investing is further defined by the following four core characteristics:
INTENTIONALITY An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing.
INVESTMENT WITH RETURN EXPECTATIONS Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.
RANGE OF RETURN EXPECTATIONS AND ASSET CLASSES Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.
IMPACT MEASUREMENT A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.
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
Why impact investing?Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.
The impact investing market offers diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns.
Many types of investors are entering the growing impact investing market. Here are a few common investor motivations:
Banks, pension funds, financial advisors, and wealth managers can PROVIDE CLIENT INVESTMENT OPPORTUNITIES to both individuals and institutions with an interest in general or specific social and/or environmental causes.
Institutional and family foundations can LEVERAGE SIGNIFICANTLY GREATER ASSETS to advance their core social and/or environmental goals, while maintaining or growing their overall endowment.
Government investors and development finance institutions can PROVIDE PROOF OF FINANCIAL VIABILITY for private-sector investors while targeting specific social and environmental goals.
Who is making impact investments?Impact investment has attracted a wide variety of investors, both individual and institutional.
Fund Managers
Development finance institutions
Diversified financial institutions/banks
Private foundations
Pension funds and insurance companies
Family Offices
Individual investors
NGOs
Religious institutions
Source:https://thegiin.org/impact-investing/need-to-know/
