Impact Investing: Definition, Types, and Examples (2024)

What Is Impact Investing?

Impact investing is making investments to help create beneficial social or environmental effects while also generating financial gains. This investment strategy can involve different types of asset classes, such as stocks, bonds, mutual funds, or microloans. The point of impact investing is to use money and investment capital for positive social results.

Key Takeaways

  • Impact investing is an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact.
  • Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.
  • Socially responsible (SRI) and environmental, social, and governance (ESG) investing are two approaches to impact investing.
  • More than 88% of impact investors reported that their investments met or exceeded their expectations.
  • A 2021 study showed that the median impact fund realized a 6.4% return, compared to 7.4% from non-impact funds.

Understanding Impact Investing

The term impact investing was first coined in 2007, but the practice was developed years earlier. A basic goal of impact investing is to help reduce the negative effects of business activity on the social or physical environment. That's why impact investing may sometimes be considered an extension of philanthropy.

Investors who use impact investing as a strategy consider a company's commitment to corporate social responsibility (CSR) or the sense of duty to positively serve society as a whole before they become involved with that company. The type of impact this creates varies based on the industry and the specific company within that industry. Some common examples include giving back to the community by helping the less fortunate or investing in sustainable energy practices to help save our planet.

Impact investing actively seeks to create positive social and environmental outcomes through investing, for example, in nonprofits that benefit the community or in clean-technology enterprises that benefit the environment.

The bulk of impact investing is done by institutional investors, including hedge funds, private foundations, banks, pension funds, and other fund managers.

However, a range of socially conscious financial service companies, web-based investment platforms,and investor networks now offer individuals an opportunity to participate, too. One major venue is microfinance loans, which provide small-business owners in emerging nations with startup or expansion capital. Women are often the beneficiaries of such loans.

Types of Impact Investments

Impact investments come in many different forms of capital and investment vehicles. Like any other type of investment class, impact investments provide investors with a range of possibilities when it comes to returns. But the most important thing is that these investments offer both a financial return and are in line with the investor's conscience.

67%

According to a 2020 survey by the Global Impact Investing Network (GIIN), the majority of investors who choose impact investing look for market-rate returns.

The opportunity for impact investments varies and investors may choose to put their money into emerging markets (EM) or developed economies. Impact investments span several industries including:

  • Healthcare
  • Education
  • Energy, especially clean and renewable energy
  • Agriculture

Environmental, Social, and Governance (ESG)

Environmental, social, and governance (ESG) refers to the practices of the company being invested in. ESG investors look for companies that have ethical governance, prioritize the well-being of workers in their supply chain, or work towards positive environmental outcomes and sustainable business practices.

The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyondtechnical valuations. While there is an overlay of social consciousness, the main objective of ESG valuation remains financial performance.

Socially Responsible Investing (SRI)

Socially responsibleinvesting (SRI) goes a step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines. For example, SRI investors may avoid investing in companies that are involved in producing or selling alcohol, tobacco, or firearms.

The underlying motive could be religion, personal values, or political beliefs. Unlike ESG analysis which shapes valuations, SRI uses ESG factors to apply negative or positive screens on the investment universe. SRI is often considered a type of impact investing. However, SRI may focus more on avoidance of harm, while impact investing also suggests a positive impact via its investments.

When focused on environmental causes, SRI may be known as green investing.

Many asset management companies, banks, and other investment houses now offer funds specifically tailored to socially responsible investors.

Special Considerations

Socially and environmentally responsible practices tend to attract impact investors, meaning companies can benefit financially from committing to socially responsible practices. Impact investing appeals largely to younger generations, such as millennials and Gen Z, who want to give back to society, so this trend is likely to expand as these investors gain more influence in the market.

Investors also tend to profit. A 2020 survey by the Global Impact Investing Network found that more than 88% of impact investors reported that their investments were meeting or surpassing their financial expectations.

By engaging in impact investing, individuals or entities essentially state that they support the message and the mission of the company in which they're investing. A long-term goal of impact investing is that, as more people realize the social and financial benefits of impact investing, more companies will engage in socially responsible business practices.

While money isn't everything, in a 2020 survey of impact investors, more than 88% of respondents said that their investments were meeting or exceeding financial expectations.

Examples of Impact Investing

The Gates Foundation

One of the most well-known impact investment funds is the Bill & Melinda Gates Foundation, launched by the celebrated Windows pioneer with a total endowment of over $67 million. While most of the Gates Foundation is engaged in philanthropy, it also has a strategic investment fund.

The fund has over $2.5 billion under management, which is invested in ventures that align with the Foundation's goals of improving health, education, and gender equality. As explained on the fund's website, the strategic investment fund supports "organizations or projects that benefit the world's poorest and are often overlooked by traditional investors."

Soros Economic Development Fund

The Soros Economic Development Fund is part of the Open Society Foundations, launched by billionaire philanthropist George Soros. As of December 2022, the fund had $130 million actively invested in impact ventures. As the name implies, the Foundation seeks to support "open societies" by promoting democracy, legal reforms, higher education, and journalism, as well as other fields.

The Ford Foundation

The Ford Foundation was launched in 1936 by Edsel and Henry Ford, with an initial endowment of $25,000. Today, the Ford Foundation has one of the world's largest private endowments, with more than $16 billion under management. Most of that money is given as grants to support causes aligned with the values of the foundation; however, in 2017 the Ford Foundation announced plans to invest $1 billion in business ventures aligned with their mission.

What Is Impact-Focused Investing?

Impact-focused investing, or simply impact investing, is an investment strategy that seeks to achieve social or environmental goals, as well as generate profit. Unlike philanthropic endeavors, impact investors typically expect a return on their investment, although this may be a secondary consideration.

Does Impact Investing Work?

Most impact investors seek returns that are comparable to market rates, and some impact funds can even outperform the market. Generally speaking, the returns from impact investing tend to be slightly lower than the market average. In a 2021 study by the University of California, the median impact fund had a median internal rate of return of 6.4%, compared to 7.4% from non-impact-seeking funds.

What Is the Difference Between ESG and Impact Investing?

Environmental, social, and governance practices refer to business decisions that could affect the returns of that company. For example, a company that knowingly employs child labor or engages in discrimination could be at a competitive disadvantage, particularly when marketing to socially conscious consumers.

Impact investing, on the other hand, is the practice of seeking investments that specifically optimize a goal other than profits. This might include investments in clean energy, education, or microfinance.

What Is an Impact-Investing Firm?

An impact-investing firm is an investment fund that specifically seeks to support beneficial social or environmental outcomes, in addition to generating financial returns. Some impact funds invest in causes that they believe will generate strong returns; others consider profits to be a secondary consideration.

What Is an Impact-Investing Strategy?

An impact-investing strategy is an investment strategy that targets companies or industries that produce social or environmental benefits. For example, some impact investors seek to support renewable energy, electric cars, microfinance, sustainable agriculture, or other causes that they believe to be worthwhile.

The Bottom Line

Impact investing is part of a growing trend of socially responsible practices that seek to reduce some of the negative consequences of traditional business activities. By supporting companies and industries in worthwhile causes, impact investing can produce social or environmental benefits while also earning a profit.

Impact Investing: Definition, Types, and Examples (2024)

FAQs

Impact Investing: Definition, Types, and Examples? ›

An impact-investing strategy is an investment strategy that targets companies or industries that produce social or environmental benefits. For example, some impact investors seek to support renewable energy, electric cars, microfinance, sustainable agriculture, or other causes that they believe to be worthwhile.

What is impact investing with examples? ›

Invest directly in private companies or funds with an explicit social mission. This may be through venture capital investment or share purchases. For example, you could invest in companies that focus on solar power, carbon sequestration or alternative fuels. Lend to a nonprofit, whose mission you want to support.

Which are the 4 core characteristics of impact investment? ›

According to the Global Impact Investing Network (GIIN), intentionality is identified as the first of four core characteristics of impact investing: the other three are using evidence and impact data in investment design; managing impact performance; and contributing to the growth of the industry.

What are the three components of impact investing? ›

The main elements of impact investing include:
  • Intentionality. Impact investing is purpose-driven. ...
  • Measurable Impact. Impact investments have measurable, quantifiable and transparent outcomes. ...
  • Expected Returns. Like traditional investments, impact investments involve an assessment of risk and return.
Oct 25, 2023

What are impact investing methodologies? ›

Impact investing relies on measuring the specific change that an investor's capital has enabled. Most impact-focused investing strategies help investors focus on economic activities that address specific sustainability challenges outlined by the United Nations Sustainable Development Goals (SDGs).

What is impact investment for dummies? ›

Unlike traditional investing, where the goal is purely financial gain, impact investing seeks to make a difference. Impact investing firms support causes like renewable energy, healthcare, education, and economic development.

What is the difference between ESG and impact investing? ›

Impact investing is more focused and deliberate in seeking investments with a specific social or environmental outcome. In contrast, ESG investing considers a company's ESG factors and traditional financial metrics. This is one of the main differences between ESG and Impact investing.

What are the 3 major types of investment styles? ›

The major investment styles can be broken down into three dimensions: active vs. passive management, growth vs. value investing, and small cap vs. large cap companies.

What are the 3 main investment categories? ›

There are three main types of investments:
  • Stocks.
  • Bonds.
  • Cash equivalent.

What is the impact investment category? ›

Impact investing occurs across asset classes; for example, private equity/venture capital, debt, and fixed income. Impact investments can be made in either emerging or developed markets, and depending on the goals of the investors, can "target a range of returns from below-market to above-market rates".

What are the risks of impact investing? ›

One of the key risks is that impact investments may not generate the intended social or environmental impact. Another risk is that financial returns may be lower than anticipated. There are a number of different types of impact investments.

Is impact investing part of ESG? ›

No, impact investing is not equal to ESG investing, although they are often used interchangeably.

What do impact investors do differently? ›

By definition, impact investing means doing something different. Traditional investors focus on financial returns; impact investors must make an intentional 'contribution' to measurable social and environmental outcomes.

What is another word for impact investing? ›

In general, impact investing is an umbrella term and can be used as a broad synonym for ESG investing and socially responsible investing.

What are the different types of impact funds? ›

There are several types of impact funds, including Environmental, Social, and Governance (ESG) funds, Socially Responsible Investing (SRI) funds, community investing funds, green bonds and green funds, thematic impact funds, and impact-focused private equity and venture capital funds.

How to measure impact investing? ›

The method consists of six steps.
  1. Assess the Relevance and Scale. ...
  2. Identify Target Social or Environmental Outcomes. ...
  3. Estimate the Economic Value of Those Outcomes to Society. ...
  4. Adjust for Risks. ...
  5. Estimate Terminal Value. ...
  6. Calculate Social Return on Every Dollar Spent.

How do impact investors make money? ›

Impact investing is an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact. Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.

What are the cons of impact investing? ›

One of the key risks is that impact investments may not generate the intended social or environmental impact. Another risk is that financial returns may be lower than anticipated. There are a number of different types of impact investments.

How much do impact investors make? ›

Social Impact Investing Salary
Annual SalaryHourly Wage
Top Earners$146,000$70
75th Percentile$126,000$61
Average$102,220$49
25th Percentile$78,000$38

References

Top Articles
Latest Posts
Article information

Author: Geoffrey Lueilwitz

Last Updated:

Views: 5705

Rating: 5 / 5 (80 voted)

Reviews: 95% of readers found this page helpful

Author information

Name: Geoffrey Lueilwitz

Birthday: 1997-03-23

Address: 74183 Thomas Course, Port Micheal, OK 55446-1529

Phone: +13408645881558

Job: Global Representative

Hobby: Sailing, Vehicle restoration, Rowing, Ghost hunting, Scrapbooking, Rugby, Board sports

Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.