April 20, 2017

Impact investing – mixing profits with purpose

Impact investing (sometimes also referred to as mission-related investing) is an investment strategy where an investor proactively makes investments that can generate both financial returns, as well as intentional social or environmental returns for the community.

Impact investing differs from socially responsible investing in that the investor seeks investments that meet financial, social and/or environmental goals, whereas socially responsible investors tend to avoid, or screen out, harmful investments in companies that display poor environmental, social and governance criteria.

What are some examples of impact investing?

Some examples of impact investing include:

  • microfinance (providing loans and financial services to low-income groups)
  • health and education-related investments
  • renewable energy and clean technology projects
  • ecotourism
  • infrastructure investments in poor countries.

In many cases, impact investments not only provide the potential for attractive financial returns, they also offer investors significant diversification benefits, and potentially access to faster-growing emerging markets.

Why is impact investing becoming more popular?

The concept of providing profit-seeking capital to generate social and environmental good is gaining mainstream popularity with many charities, foundations and wealthy private individuals. This is because these investors want to move beyond simply avoiding harmful investments (ie socially responsible investing) to providing a better overall solution than may be possible from pure philanthropy (eg a charitable donation).  Additionally, many charities and foundations have significant capital which is used to fund ongoing charitable giving programs and part of their investment portfolios can be used to make impact investments, without necessarily sacrificing financial returns.

Impact investment capital can range from debt, equity, working capital credit lines and loan guarantees.

What do impact investors aim to achieve?

Impact investors typically fall into two groups:

  • Impact-first investors – those who seek to maximise the social or environmental impact, subject to receiving a minimum financial return (eg the inflation rate). These philanthropic investors primarily aim to generate social or environmental good, and are often willing to give up some financial return. Impact-first investors typically seek to use capital market-based mechanisms to create maximum impact.
  • Financial-first investors – those who seek to maximise financial returns, subject to achieving a minimum social or environmental impact. They are usually commercial investors who seek sectors that offer market returns while achieving some social or environmental good. They may do this by integrating social and environmental value drivers into investment decisions, by looking for outsized returns in a way that leads them to create some social value (eg clean technology), or in response to regulations or tax policy (eg National Rental Affordability Scheme in Australia).

One of the challenges with impact investing is trying to measure the social and environmental returns from the investment. This is so that the impact investor can allocate capital to investments that provide the highest total return (including social and environmental returns) and to understand trade-offs between financial, social or environmental returns.  This form of measurement, or reporting, is sometimes referred to as triple bottom line (or ‘people, planet, profit’) reporting and many companies now attempt to report their social and environmental impact for the year as well as annual financial results.