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Impact Investing

Investments aimed at producing a positive social or environmental benefit in addition to returns on investment

What is Impact Investing?

Impact investing refers to investments that are made with the investor’s specific goal of producing a positive social or environmental benefit in addition to returns on investment. A prime example of impact investing is an investor who invests in renewable energy companies because he believes such an investment will positively impact the environment.

 

Impact Investing

 

Impact investments may be made in virtually any asset class, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), venture capital, and private equity. Impact investing is practiced by individuals and institutional investors such as hedge funds, pension funds, and non-profit organizations.

Impact investing is often considered synonymous with socially responsible investing (SRI). However, some investors distinguish between the two, viewing SRI as being merely aimed at investing in enterprises committed to avoiding negative social or environmental impacts. In contrast, impact investing goes a step further by seeking positive effects.

Because they are concerned with positive social or environmental effects, impact investors are sometimes willing to accept returns on investments that are below the market average. In such a situation, their investment returns are sometimes referred to as “concessionary returns.”

 

Summary

  • Impact investing is the term used to describe investments that are made with the investor’s specific goal of producing a positive social or environmental benefit in addition to returns on investment.
  • Impact investing has increased substantially as more members of the millennial generation have become active investors.
  • Disagreements exist about how effective impact investing is in achieving its desired goals and about how well impact investments perform.

 

The Phenomenon of Impact Investing

Although impact investing has been informally practiced for decades, it has only been recognized as an investment strategy since the turn of the century. It has increased in popularity as members of the millennial generation have become active investors because millennials tend to have higher levels of interest in pursuing positive social and environmental change.

Impact investments cover an extremely broad range of investment options. Impact investors commit investment capital to companies in both developed and emerging market nations. Their investments may include money aimed at supporting sustainable agriculture, renewable energy, or microfinance. Impact investors also favor companies in emerging market economies that provide fundamental services, such as housing and healthcare.

The rise of impact investing has resulted in more and more companies actively developing and pursuing practices of corporate social responsibility (CSR). Such practices include striving to reduce a company’s environmental impact and companies practicing expanded philanthropic efforts to benefit the communities in which they operate.

 

Real-World Examples

Examples of impact investing are varied and numerous. The following are just a couple of notable examples.

  • Beam Money Private Limited (Beam) is a company in India that secured private equity startup capital to fund its business enterprise that serves the “unbanked” segment of the Indian population. The company’s payment services enable people to utilize electronic payment systems even without having a traditional bank account.
  • Craft3 is a non-profit entity that provides business assistance and financing, such as loans, to individuals, companies, and other entities that lack access to traditional financing. All of Craft3’s assistance goes to individuals or enterprises engaged in socially or environmentally positive work. For example, it provides loans to individuals seeking to upgrade their home’s level of energy efficiency.

 

How Impactful Is Impact Investing?

There is considerable debate regarding how successful impact investing is in achieving its desired goals. Additionally, there is also debate on how well impact investments perform. Some reports show impact investments perform better than traditional investment strategies, while other studies indicate that impact investments usually only provide below-average returns.

The success of impact investing is a complicated issue. For example, consider an impact investor who, to promote environmental benefits, invests in a company’s stock in the solar power industry. But what if the company they choose to invest in is, in fact, a company that performs relatively poorly compared to its competitors in the industry; however, the money it receives from the impact investor enables it to overpower its competitors. You may see a situation where a company that does a poor job of providing solar energy becomes the dominant company in the industry.

Additional problems in assessing impact investing results stem from the fact that impact investments often lack methods or processes for measuring the tangible effects that corporate social or environmental policies actually provide. Many companies’ commitment to socially or environmentally responsible practices is little more than just a commitment – with little or no action.

 

More Resources

CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Asset Class
  • Environmental, Social, and Governance (ESG)
  • Institutional investor
  • Sustainable Investing

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