Impact Investing: Where Commerce Meets Compassion
Impact investing is the combination of investment and philanthropy – doing social “good” while making financial gains. Intentions and measurable impact are the two most important aspects of impact investing.
Areas of investment may include affordable or sustainable housing, sustainable agriculture, renewable energy infrastructure, healthcare services, education, and micro-finance.
It is clear that philanthropic organizations and governments cannot solve the world’s problems alone. Investments from capital markets can not only exponentially increase impact, but also produce returns to investors.
Impact investing is expanding, and is estimated at $9 trillion in the U.S. today. U.S. philanthropy is $390B. Government spending is $3.9 trillion, and debt and equity investments are $65 trillion (1). If just a small amount of all these investments were allocated towards impactful financial products, then we’d be a lot closer to achieving the UN’s Sustainable Development goals. These goals aim to reduce poverty, improve health and sanitation, provide clean water, education, economic growth, and more.
What it Means to be an Impact Investor
Almost anyone can be an impact investor, but the type of investments you make depend on your personal investment and impact goals. There is a spectrum of impact investments: one end is focused primarily on returns, and the other is focused primarily on impact. See this diagram from the Rockefeller Foundation:
An example of a lower impact, higher return product would be an investment in a company that has a platform of corporate social responsibility.
An example of a high impact, lower return product may include investment in companies that regularly make grants to nonprofits, or whose business model integrates social or environmental strategies.
“Impact investments can also be incredibly complex, sometimes creating new financial vehicles or new types of arrangements between partners. These pioneering deals—which could include infusing capital into startup social enterprises, for example, or investing in pay-for-success contracts—often require expert advice, especially for newcomers. – Rockefeller Foundation
The History of Impact Investing
The idea of impact investing is not new. It has been discussed philosophically and theologically throughout history:
- Both the Old Testament and the Quran discuss ethical investing as a part of Jewish and Muslim teachings.
- In the 18th century, Methodists in the U.S. avoided investing in trade associated with tobacco, alcohol, or gambling products.
- During the Vietnam war, a movement for university endowment funds to cease investments in defense funds was on the rise.
Since the 1960’s, supporting fair-trade and ESG (Environmental, Social, Governance) investments has become increasingly popular. In 2006, the United Nations launched the “Principles for Responsible Investment” which allows organizations to pledge their commitment to social responsibilities.
The catalyst for today’s impact investing hype is said to have started in 2007, when a group of investors met at the Rockefeller Foundation’s Bellagio center to discuss a way to invest while creating greater impact. A man named Antony Bugg-Levine who then worked for the Rockefeller foundation, is said to have coined the term “Impact Investing” (2).
The evolution of this type of investing has gone from avoiding investments that may have moral or ethical conflicts, such as slave labor, weaponry, gambling, tobacco, etc., to making great strides in major parts of the world. Impact investments now focus on on solutions that will help drive out poverty, solve hunger and world health issues, environmental sustainability, and the like.
Types of Impact Investments
It doesn’t matter if you’re a venture capitalist, an independent investor, sustainability advisor, or institutional investor. There are impact investment options for everyone. Here are some examples:
- Social impact bonds: These are investments that are focused on impact more so than return, as the investor’s returns are contingent to the social outcomes.
- Green bonds: Green bonds are investments aimed at supporting environmental-focused efforts like renewable energy and sustainability to fight climate change.
- Social capital: This is a type of venture capital model. Commonly referred to as “patient capital,” this impact investment is dedicated to start-up companies with a social or environmental agenda. See this previous post on rise of cleantech venture capital.
- Large corporations with an ESG-focused agenda: This is an investment option for those investors who want to focus on their returns, while still having an ESG component in their portfolio.
- ETF’s: There are various ESG index ETF’s that may be publicly traded by investors.