Impact investing is a term coined to describe investments that are made into companies, organisations, and funds that have the intention to generate social and environmental impact, as well as generating financial return.
The growing impact investment market provides capital to address some of the world’s most pressing challenges, in sectors such as conservation, microfinance, sustainable agriculture, renewable energy, and much more. This type of investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investment should focus exclusively on achieving financial returns.
While still in its early stages, impact investing is receiving a lot of attention and has seen rampant growth over the years, which is expected to continue. Many think the millennial generation, which tends to be more socially and environmentally aware than previous generations, are to thank for this growing interest in impact investing. Now that the millennial generation is becoming the largest in history, this could lead to us seeing more and more funding placed into impact investing.
Here’s a look at exactly how to spot impact investing opportunities and how to get involved.
HOW TO SPOT IMPACT INVESTING
There are four core characteristics that define impact investing.
- Intention– this is an investor’s intention to have a positive social or environmental impact through investments, which 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.
WHY SHOULD YOU GET INVOLVED IN IMPACT INVESTING?
Impact investing challenges the long-held views that social and environmental issues should only be addressed by philanthropic donations, and that market investment should focus exclusively on achieving financial returns.
Impact investing is now attracting a wide variety of investors, both individual and institutional, including: fund managers, finance institutions, private foundations, family offices, NGOs and more.
That’s because there are a diverse and viable amount of opportunities available these days for investors who are looking to get involved in impact investing. While some investors intentionally invest for below-market-rate returns, in line with their strategic objectives, others pursue market-competitive and market-beating returns.
Overall, many investors report that their portfolio performance from impact investing overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.
HOW TO GET INVOLVED IN IMPACT INVESTING
Many impact investors choose to invest through funds whose social, environmental, and financial goals match their owns. Individuals can invest in companies that are making a difference in the social and environmental landscape, or there are also several opportunities open to individuals who want to be directly involved in impact investing. Additionally, on a larger scale, financial institutions including hedge funds and private equity funds do participate in impact investing.
Overall, impact investing allows you to invest with the dual goals of seeing a return and making a positive impact on the world, whether it’s social or environmental. While impact investing is still in its early stages, the growth potential of this sector is extremely high, and shows no signs of slowing down.