When looking for an effective impact investment firm, it is first important to understand the elements of impact investing.
Core Characteristics of Impact Investing
The GIIN published the Core Characteristics of Impact Investing which laid out some of the basic elements:
An investor’s intention to have a positive social or environmental impact through investments is a core element of impact investing. The stronger an investor’s vision for the impact they hope to achieve, the more likely they are to reach their maximum potential.
Investment with Return Expectations
Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital. While the number of impact investments is growing quickly, setting financial expectations early on can help investors find their targets more effectively. When looking for an impact investment firm, it is important to go in with knowledge of both your impact goals and your realistic expectations on returns.
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.
The commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, is a critical aspect of impact investing, while also ensuring transparency and accountability in building the field.
When looking for an impact investment firm, it is important to find one which honestly and regularly measures their impact using reliable means. Impactor’s approaches to measurement varies based on their objective and capacities, goals and intention.
However, components of best measurement practices 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
Impact Investing Firms Making a Difference
While impact investing is still in its early stages of development within the larger umbrella of investing strategies, several management funds have been successful in their efforts to drive positive change through profitable impact investing. Investopedia released a report naming the top 5 impacting investing firms on the basis of assets under management.
Here, I will examine the top 3 to highlight their respective missions and current successes.
Vital Capital is an impact investing pioneer, with over 20 years’ experience of transforming, managing and growing businesses. Founded in 2011 to increase their reach and impact, they used practical expertise and local business insight to identify and invest in overlooked opportunities. Their funds have primarily focused on sub-Saharan Africa and were one of the first impact investors to join the World Economic Forum.
Their approach has delivered high-performing returns and provided over 5.4 million people with solutions to environmental challenges. This includes making $83 million in direct payments to smallholder farmers, $718 million in value of invested local purchases, and 952,000 tonnes of CO2 through renewable energy solutions. In 2021, their Relief Facility was recognized as one of the ‘30 Big Ideas Shaping ESG” by Private Equity International.
Triodos Investment oversees €6.4 billion in assets under management, which are “100% invested for impact”. Their strategies focus on Energy and Climate, Financial Inclusion, Sustainable Food and Agriculture, Impact Equities and Bonds, and Investment Management Services. Their mission is to provide investors with opportunities to invest directly in the energy transition and system transformation through funds that finance renewable energy, stimulate more efficient use, and improve access, aiming in their aggregate to ensure an affordable and reliable supply of clean energy.
Triodos further understands that the needs of developing and developed countries are different. In developed countries, they focus on the transformation of an existing energy system into a more differentiated system. Their strategies have shown themselves to be promising. In 2019, their European branch oversaw 25 sustainability centered projects, with net assets of €118.5 million.
Headquartered in Philadelphia, the Reinvestment Fund brings financial and analytical tools to partnerships aimed at ensuring everyone has access to essential resources and opportunities. As a federally certified community development financial institution (CDFI), their work improves access to and the creation of affordable places to live, access to nutritious food and healthcare, quality schools, and strong local businesses.
The Reinvestment Fund has established partnerships across a wide range of stakeholders, including city governments, neighborhood organizations, big banks and fellow CDFIs. They use financing structures such as Energy Savings Agreements (ESAs), Power Purchase Agreements (PPAs), consumer loans, and real estate energy measures.
This year, The Reinvestment Fund was once again selected to ImpactAssets 50 (2022), a free annual database for impact investors, family offices, corporate and family foundations and institutional investors that features a diversified listing of private capital fund managers delivering social and environmental impact, as well as financial returns.
Choosing the right impact investment firm can certainly be overwhelming, particularly as the volume of firms utilizing this method grows by the year. However, building a distinct vision and mission for impact acts as a guide towards a particular firm or strategy.
Whether it be mitigating climate change, building community stability, or ensuring access to basic essential resources, impact investing allows an individual to bring their vision of impact to life, whose ripple effects are felt far beyond a profitable annual return. The stronger the foundation of purpose, the more efficient that investment is likely to be over time.