Impact investing is a rapidly growing approach to sustainable investing that seeks to generate measurable positive social or environmental impact alongside financial return.

Impact investing is a rapidly growing approach to sustainable investing that seeks to create value for investors, and society, by investing in companies, organizations and funds with the intention to generate measurable positive social or environmental impact alongside financial return.

Motivated to do more with their investments than solely earn a traditional rate of return, impact investors are increasingly using this approach to pursue social and environmental goals for which they are passionate and that are in keeping with their personal and financial objectives.

Indeed, impact investments are seeing considerable growth, with assets under management growing by 13% annually from 2013 to 2017. Going forward, these types of investments are expected to grow even more as significant amounts of wealth transfer in the future to more socially conscious investors such as millennials and women.

Historically, impact investing most commonly involves the use of private equity or private debt to deploy capital to impact investments. According to a recent survey by the Global Impact Investing Network (GIIN), roughly 41% of respondents said that their impact assets are allocated through private debt and 18% through private equity (either in direct investments in companies or projects, or through funds that invest in a portfolio of companies). Depending on an investor’s motivations and goals, however, opportunities in impact investing may also exist in more conventional asset classes. As with all private investing, due diligence, manager selection and liquidity are critical considerations in the investment process.

Impact investments may be made in both developed and emerging markets and across a broad range of sectors. Many of these investments take actions suggested by the United Nations (UN) in April 2016 in its Principles for Responsible Investing (PRI) for ways in which investors can incorporate social consciousness into their investment practices. In addition, they build on a list of goals published by the United Nations in 2015, known collectively as Sustainable Development Goals, created as a guide for those actions and strategies needed to combat hunger, eliminate poverty and improve the quality of life of people around the world.

Impact investments are made across a variety of sectors

The return objectives of impact investors may differ considerably depending on the investor’s goals. For example, some investors may wish to focus on funding opportunities that seek to generate both positive social and environmental impact and market or above-market returns. Other investors, however, may be willing to accept below market, or concessionary, returns because of the potential social or environmental benefits.

While past performance does not guarantee future results, several studies have shown that impact investors have been generally satisfied with both the financial performance and impact of their investments. For instance, almost 80%  of respondents to GIIN’s 2018 Impact Investor Survey reported that their investments have performed either in line with or exceeded both impact and financial expectations. Another study sponsored jointly by GIIN and Cambridge Associates found that a group of 50 impact funds delivered returns comparable to a set of otherwise similar funds that did not have social impact as a goal.

As the popularity of impact investing continues to grow, measuring the impact of these kinds of investments will continue to play a critical role in enabling investors to judge performance and make informed decisions on the potential of their investments for social and environmental impact. This is particularly important in the area of impact investing as investors will require some sort of evidence of the social impact these investments may have beyond financial returns.

Progress against objectives is now being tracked through the use of both standard and custom metrics, as well as qualitative data on social and environmental impact. This includes investor-developed proprietary metrics and frameworks, generally accepted performance metrics managed by GIIN, and standard frameworks and assessments created by organizations such as the Global Impact Investing Rating System, the Sustainability Accounting Standards Board and the Global Reporting Initiative.

The Sustainable Investing Series 

Investors around the world are increasingly interested in ways to use their capital to help support and achieve positive environmental and social outcomes. In this series, we outline the various approaches to integrate environmental, social and governance (ESG) considerations into your investment strategy.