What is the State of Impact Investing Today?

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Impact Investing is Trending 

Impact investing has been a buzzword on the rise in the last few years. While the idea of making investments that not only generate profit, but also has positive social or environmental impact has been done for decades, it’s only recently gained main-stream popularity. Impact Investing, defined by the The Global Impact Investing Network (GIIN)  as “investments that primarily aims to create beneficial social and environmental impact while generating financial return and value,” is currently a $502 billion global market, and growing. 

Graph: https://www.forbes.com/sites/annefield/2017/01/31/more-evidence-impact-investing-growth-and-what-it-means-for-social-entrepeneurs/

The Evolution of Impact Investing:

The evolution of impact investing over the last two decades has proven that capital is king when it comes to having real impact. In order to truly solve some of the world’s greatest issues in energy, agriculture, food, healthcare, and general social wellness, we have to put serious economic focus into these areas. 

Venture Capital (as we’ve explained here) has shown to not be the best way to approach impact investing. Since energy, water, and food are the largest industries in the world, it takes an immense amount of financial support in order to strategically transform these industries. 

Types of Impact Investments:

Since there is a wide range of areas that investors are interested in seeing positive impact, as well as performance expectations, there is by nature, various realms of impact investing. Common types of impact investments include:

  1. Green Bonds
  2. Socially Responsible ETF’s 
  3. Private sector impact investments 

However, as you can see here, impact investing is not limited to a size or type of investment vehicle. Since there is no regulation on the definition of impact investing, all of the areas below can act as potential “impact investments.”

How Impact Investing is Measured 

The biggest challenge in Impact Investing is the lack of consistency in how “impact” is measured. Diane-Laure Arjaliès, assistant professor at the Ivey Business School writes in her article “Why Impact Investing Matters: A Primer:”

“Measuring impact is art and science…Investors and managers alike increasingly want to assess businesses’ impact on society. But measuring a firm’s wider societal impacts is not easy. Accounting standards for measuring impact do not exist, and the measures in use are still evolving…”

As Arjaliès explains, there are so many types of impact investments, that the basis for measurement is inherently inconsistent. For example, a Forest Bond may be measured based on its biodiversity protection, whereas a real estate development may look at the number of parks in a neighborhood, energy use, and access to employment. 

The Difference Between ESG and Impact Investing

ESG and Impact Investing are often confused, and rightly so. However, they are pretty different from an investment approach. 

→ In a nutshell, ESG investments look mainly at the company operations and determine whether they have “positive” environmental, social, and governance metrics, or at the least, no “negative” metrics. 

→ On the other hand, Impact investing pays more attention to the actual products and services that a company is offering that have a more direct impact in the areas of sustainability and social welfare. 

Graph retrieved from Technically Philly

In general, ESG allows investors to ensure they are not investing in companies with a net negative impact, whereas impact investing ensures there is a net positive impact. 

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. 

September 11, 2019

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