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Points to Look for When Choosing an Impact Investment

Impact investments aren’t just made by avoiding negatively impacting investments. Instead, they’re made by focusing on companies that make significant positive impact through any of these vehicles.
Green economy growth with businessman

Impact Investing has been developing and evolving over the last decade as consumers and investors alike demand solutions to the world’s biggest environmental and global health issues. These investments are meant to make money, while promoting and maintaining social/ and or environmental responsibility. Impact investing is the next level of investing beyond environmental, social, and governance (ESG).

Impact investments aren’t just made by avoiding negatively impacting investments. Instead, they’re made by focusing on companies that make significant positive impact through any of these vehicles.

Who does Impact Investing?

Individual and institutional investors alike have been attracted to impact investment opportunities. GIIN reports that impact investing across all investing platforms and instruments is rising:

“While some investors have been making impact investments for decades, recently there has emerged a new collaborative international effort to accelerate the development of a high- functioning market that supports impact investing. While this market is still relatively new, investors are optimistic overall about its development and expected increase scale and efficiency in the future”

What to look for when choosing an impact investment

1. Familiarize yourself with the terminology and do some research

Educate yourself about some of the acronyms and terminology you are likely to see in the impact-investing sphere. There are many different ways to participate in impact investing – from index funds that screen out companies according to certain criteria to venture capital funds that finance social enterprises. Having a basic level of knowledge of the terminology will help you evaluate your choices and figure out what makes sense for you.

The Global Impact Investing Network gives a helpful overview on terminology and everything else you need to know about Impact Investing.

2. The Impact Investing Spectrum

To help make impact investment decisions it is important to know where you stand, or where you would like to stand on the impact investment spectrum. An impact investment management firm has developed the following spectrum to help new investors visualize the varying approaches to impact investing depending on the impact and financial goals of the investor.

impact investing spectrum
Graph retrieved from Technically Philly

3.How do impact investments perform financially?

Many mainstream investors often fear or lack the knowledge in impact investments, leaving the field to adventurous venture capitalists and non-governmental organizations (NGOs) who act as “first institutional investors”. They still believe that impact investments provide lower returns.

A study by McKinsey that looked at 48 impact investor exists between 2010 and 2015 found that they produced a median internal rate of return (IRR) of about 10 percent. The top one-third of deals yielded a median IRR of 34 percent, clearly indicating that it is possible to achieve profitable exits in social enterprise.

According to GIIN:

Impact investors have diverse financial return expectations. Some intentionally invest for below-market returns, in line with their strategic objectives. Others pursue market-competitive and market-beating returns, sometimes required by fiduciary responsibility. Most investors surveyed in the GIIN’s 2020 Annual Impact Investor Survey pursue competitive market-rate-returns.

Most respondents of the survey report that portfolio performance 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.

Although very few investors report significant risk events in their impact investing portfolios, business model execution and management, is by far the most often cited contributor to risk.

The demand for impact investing is higher than ever today and continues to grow. At Transformation, we are taking the opportunity of this demand to create sustainable and high-impact projects in the areas of energy, water, agriculture, and technology.

July 22, 2020

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