What is social impact investing?
The term "impact investing" first emerged in 2007 as a commitment to measuring the social and environmental performance of investments with the same rigour in which financial performance is measured.
Since then, the number of funds put into impact investing has grown significantly. The popularity of impact investing is partly due to the criticism that traditional forms of Investments are unsustainable and driven by individual goals.
Many renowned development finance institutions such as the British Commonwealth Development Corporation, the Norwegian Norfund and investors internationally are making impact investments to unleash the power of capital for good and develop projects with social and environmental benefits.
What is social impact investment funds?
Social impact investment funds are investments made into companies and non-profit organizations to create measurable and positive social and environmental impact while generating a financial return.
Simply put, impact investing provides capital to address the world’s most pressing social and environmental challenges (sustainability, healthcare, education, renewable energy, etc.). Impact investments funds can be put into both emerging and developed markets and include different asset classes.
Social impact investing: who makes the investments?
Social impact investing attracts individuals and institutional investors like private foundations, banks, hedge funds or any other fund managers, all with the desire to make impactful changes. Those investors set up a strategy to positively impact communities by investing assets such as private equities, venture capital, debt or fixed outcome in impact projects.
- Banks and financial institutions
- Development finance institutions
- Non-Governmental Organizations (NGOs)
- Fund managers
- Private foundations
- Religious institutions
- Pension funds
- Individual investors
- Insurance companies, etc.
The difference between social impact investing and socially responsible investing
Social impact investing and socially responsible investing are two correlated concepts. Impact investing is a subset of socially responsible investing. While socially responsible investing (also known as socially conscious investing) emphasizes avoidance of harm, impact investing seeks a positive impact.
Investors who make socially responsible investments are very precautious when choosing which companies to invest in as they believe they should share the same values and views for environmental protection, human rights and so on. They will be looking for ESG (environment, social and governance) focused investments. The same is true for social impact investments. But investors also take into serious consideration whether their investments are going to create a positive impact on the community and environment.
Characteristics of social impact investing
The practise of impact investing is defined by a set of key characteristics that should be met for the investment to be considered impactful. These characteristics help investors identify practical actions to improve their practice, but most importantly, they ensure the credibility of impact investing.
Intentionality
We can define impact investing by the investors' desire to have a positive social and environmental impact with measurable benefits. Social impact investors are here to solve problems and seize opportunities to improve the overall social sphere.
Investments with return expectations
Besides social and environmental results, we expect impact investments to generate a positive financial return, or at the very least a return of capital. To fulfill these expectations, effective communication and feedback loops are essential. Discussion of performance and process improvement will help to have a better impact in the future.
Use of evidence and impact data
Investments should not be based on intuitions. This applies even more to social impact investing where the results can have impacts beyond the investors or organization. Impact investing needs to rely on evidence and reliable data to drive intelligent investment decisions that will result in social and environmental benefits.
Impact measurement
An indicator of a good investment is the investor's ability to measure and report the social and environmental benefits and performance of their investment while ensuring complete transparency and accountability in their practices, strategies and goals. It also includes sharing learnings and lessons from past investments to make even greater investment decisions and help society. Depending on each investor’s objectives and intentions, impact measurement can include:
- Analyzing performance metrics related to these objectives
- Monitoring the performance of investments towards the targeted objectives
- Reporting performance to relevant stakeholders
Why is social impact investing important?
The importance of social impact investing lies in the fact that it not only tackles important social and environmental matters but also challenges the long-held views that these issues should be exclusively addressed by non-profit and philanthropic organizations.
Moreover, impact investing appeals to younger generations who want to give back to society and change the world for the better. As more people start to realize the benefits of social impact investing, more companies will engage in social responsibility.
As the market of impact investing grows and gains more visibility, investors emphasize the following key benefits:
- Provides investment opportunities for both individuals and institutions through banks, financial advisors and pension funds.
- Leverages significant assets to advocate social and environmental goals while maintaining and growing overall endowment.
- Allows government investors and financial institutions to provide proof of financial viability to private sector investors while targeting specific social and environmental causes.
How do social impact bonds work?
Social impact bonds work in a way that investors who use them consider a company’s commitment to corporate social responsibility before choosing to get involved with that company. The type of impact that can result from this strategy depends on the industry but also the business itself. Generally, companies focus on getting involved in projects that give back to the community by helping the less privileged or investing in protecting the environment.
Institutional investors make the majority of impact investing. However, there has been an increase in investor networks, socially conscious service companies and investment platforms that allow individuals to get involved.
As an example of how social impact investing works, take microfinance loans. Those loans give small-business owners in emerging countries a startup or expansion capital to boost their business.
Types of social impact investment funds
Nowadays, impact investments can mean anything from capital investments in new healthcare technologies to microfinance loans in Kenya and from affordable housing in the US to renewable energy in Cambodia. With many possibilities available to them, investors must choose investments aligned with their vision and values. Every investor has their idea of the social impact they are trying to achieve. Maybe they are more concerned with helping emerging countries or are more inclined to defend a cause that is dear to them in healthcare or education. There is no right or wrong impact, just a matter of preference. These investments can be classified into five categories:
1. Place
An investor can choose to invest in companies or projects located in a specific area (a country or region of the world) or that benefit a particular group of people. For example, investors could invest in a company that has chosen to be located in a poor neighbourhood to create more job opportunities. They can also invest in an emerging country to give the locals access to certain privileges (education, healthcare, jobs, etc.).
2. Process
Investors can also rely on the internal process to make their investment decisions. Meaning that they pay careful attention to business practices and make sure they resonate with them. A few examples include equitable labour practices, fair trade and buy-one-donate-one models.
3. Planet
Investors keen on the environmental issue can choose to put their investment funds in organizations or projects which have a clear and measurable positive environmental impact. It can either be through natural habitat preservation or a more preventive approach such as carbon emissions reduction by creating cleaner energy sources.
4. Product
Investments can also be product-oriented in order to boost the sale of products or services that have positive social and environmental benefits within healthcare, education, renewable energy and agriculture. Investments could help create new training programs for young professionals or students, build a new modern healthcare facility that provides free testing, etc.
5. Paradigms
In this category, the investments try to change an entire system for the better. Often, this includes institutional investors or companies that aim to create impactful changes that will be sustainable in the long term.
The current state of the impact investing market
The market of impact investing is booming now more than ever. In June 2020, the Global Impact Investing Network (GIIN) published a report that estimates the current market size at $715 billion. The report also shows that even though the market is relatively new, investors are optimistic about its future growth, considering there are an international effort and collaboration to develop a high-functioning market that supports social impact investing.
The expected increase and efficiency are shown through key indicators of market growth such as the increase of government support, the progress on research on market trends and performance, the improvement of impact measurement and the rising number of high-quality investment opportunities.
Social impact investing has become leverage to introduce social responsibility to businesses as a way to participate in making socially and environmentally impactful decisions that will sustain the development of society as a whole.
