Impact investing is a specific approach of “investing for the common good” alongside ethical investing, sustainable investing, socially responsible investing (SRI), and environmental, social and governance (ESG) investing. Although they are often grouped together in everyday conversation and media coverage, there are different methodologies associated with each of these approaches.
The Global Impact Investors Network (GIIN) defines Impact Investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. The term was first coined by the Rockefeller Foundation in 2008.
In an early study, JP Morgan identified it as an emerging new asset class but today, impact investing is increasingly viewed as a lens through which investors identify, analyse and evaluate investments. The scope of impact investing has also been extended to including “both emerging and developed markets as well as across all asset classes … target a range of financial returns from below market to market rate, depending on their strategic goals”.
Unlike SRI or ESG investing, impact investing is not just about avoiding “sin stocks” or “do-no-harm”, but also actively deploying capital to address specific social and environmental objectives while generating financial returns for investors. Different from other approaches, impact investing funds not only use ESG and SRI methodologies to filter opportunities, but also require intentionality: portfolio companies must track, measure and report on their social and environmental impact.
It is already an industry with $502 billion US in assets under management and over 1300 organizations actively involved worldwide. Its ability to generate (market-rate) financial returns alongside measurable impacts can potentially attract substantial new assets from mainstream investors.
Why Is It Necessary to Invest for Impact and Profit?
The need for impact investing has arisen from the persistence of grand societal challenges (e.g. ageing, inequality, social exclusion, and unsustainable development) and the inability of existing institutions (including governments, NGOs, charities, and philanthropy) to eradicate them.
In 2016, the United Nations identified 17 Sustainable Development Goals (SDGs), but achieving these SDGs in 2030 will require $5 to $7 trillion each year, with an annual investment shortfall of $2.5 trillion in developing countries.
The OECD DAC report highlighted that in 2016, the total official development assistance reached a peak of $142.6 billion,6 which is one order of magnitude smaller than what is needed. By addressing social and environmental challenges while generating market rate returns, impact investing can unlock substantial capital from mainstream investors to complement philanthropy and government in addressing some grand societal challenges.