Impact investing is a type of investment that provides financial gains, as well as generating positive impacts on social or environmental aspects which they represent.
The investments are exactly what the name exemplifies and are meant to bring value to society rather than solely the investor. A 2016 GIIN survey reports that investors committed more than 15 billion dollars to impact investments in 2015 and plan to commit 16% more capital than that in 2016.
Impact investing is slowly on the rise thanks to reliable data and market analysis. Below are some important factors to consider when investors are determining what type of impact investment to enter.
Impact Investing Characteristics
Impact investing has three main requirements:
First of all, they should have intentionality. In other words, they need to provide a positive social or environmental impact.
Secondly, investors should expect a financial return on capital or, at a minimum, a return of capital.
Lastly, the range of financial returns is measured from below market to risk-adjusted market rate of return.
The investments can be made across asset classes, such as; cash equivalents, fixed income, venture capital, and private equity.
Investors understand their objectives when entering the diverse fields of social or environmental investments, and are committed to measuring and reporting the effects and performance of the investment, thus enabling everyone to better understand how impact investments are contributing and allowing transparency for other groups.
Different Impact Investing Opportunities
Individuals may invest in a broad range of markets as long as they contribute to society.
Sustainable agriculture is popular with impact investors because it protects the environment, public health, human communities, and animal welfare. Also, renewable energy remains at the forefront of impact investing because it provides electricity generation, air, transportation, and water heating or cooling via the sun, rain, the wind, and geothermal heat. The list goes on with conservation, water, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
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Banks or financial investors may help individuals with their impact investment strategies to gain financially on both sides or to provide contributions to society. Family foundations or institutions may choose to invest to better their endowments. Or, government investors may enter a field with specific goals they want to represent.
Examples of Impact Investments
A New York Times article in 2015 states that Bill Gates staff reported that the foundation’s impact investments totaled $1.5 billion—more than triple the total in 2009. It is not surprising that Gates performs in one of the world’s largest impact investments. He is a top philanthropic player and has tackled areas such as; infectious diseases which partner with biomedical firms, agricultural development, and financial inclusion.
One of GIIN‘s top investors is the Calvert Foundation. This foundation invests to increase the flow of capital into disadvantaged communities. The investee, Craft3, is a nonprofit, non-bank community development financial institution with a mission to strengthen economic, ecological, and family resilience in Pacific Northwest communities of the United States.
Why Choose Impact Investing?
It is easy to assume investors contribute to impact investments because of the prominent contributions to society they yield. However, the low risks involved fused with the increased financial gains are a major factor that contributes to its popularity.
Moreover, investors report that portfolio performance overwhelmingly meets or exceeds investor expectations for both social/environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.
The best outcomes result when investors work with an advisor or a group of investors who are familiar with the data behind a given cause or initiative. The risks are not only lower, but the benefits are more clear to operations with similar ambitions. Choosing a field that aligns with current goals or expectations is proven to aid in the investment’s outcome and improves portfolios.
There’s no doubt that impact investing is growing in popularity and reaching out beyond the realm of philanthropy.
What do you think? Let us know in the comments section below!