What is Impact Investing and Why Does It Matter?

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Many types of investments offer considerable potential, but in recent years few have garnered the attention of Impact Investing. Today, I’m going to tell you why. In brief, this form of investing has become more popular because it can elicit a substantial impact on popular social or environmental goals (Chhabra, 2015).

What is Impact Investing?

Impact Investing is investing in organizations, companies, and funds with the intent of getting a beneficial return in terms of not only money, but social or environmental impact (Global Impact Investing Network, 2016). This type of investing began to emerge in the 1990s, when people were looking for a positive way of curbing or minimizing potentially negative social or environmental impacts through investing. Impact Investing can be done in a number of different markets, from the well-established to those that are just getting off the ground. In addition, the rates of return can range from the minimum (simply getting your money back, perhaps with a small profit) to reaping a large bonanza, depending on the circumstances.

The philosophy behind the investing is rooted more in making positive change in the community than making a substantial return, although the latter is still part of the equation. In general, those who invest in this manner have a social or environmental issue or angle that they wish to pursue. The idea is that by weaving the investment impulse into the impulse of helping the greater good, companies will be motivated to be mindful of the greater good (in ways that they wouldn’t if they were met with confrontation or protest).  

The investments can take place within traditional businesses, organizations, and nonprofits. In addition, because of the versatility of the investing platform, it is common for even those in debt or on a fixed income to engage in Impact Investing.

History

The idea of investing with a sense of environmental or social responsibility has been around for many decades. Still, for a long while, virtually all investing driven by a sense of social value was done with the idea of avoiding specific companies or organizations as a roundabout way of confronting their perceived wrongdoings. It was not until the 1990s when Jed Emerson voiced an approach that blended the usual values with the potential for positive financial gain (Emerson, 2016).

Around the turn of the 21st century, new types of investing approaches were in emergence, ones that included preventing pollution and enhancing corporate and social responsibility. By then, the movement to use investing for creating positive, tangible change as opposed to pure profit was beginning to really take shape. This was particularly true on the environmental side of the equation, with investment benefits that ranged from protecting the land to curbing climate change.

However, it was not until 2007 when this newfangled form of investment gained its name. The term “Impact Investing” was coined to describe the inclusion of what was known as intangible assets alongside of financial ones in order to create positive outcomes.

Impact Investing Right Now

Over this past decade, Impact Investing is expected to grow from roughly $50 billion to perhaps a half-trillion dollars, depending on a number of circumstances (Sullivan, 2010). However, even if it only reaches half the expected amount, Impact Investing has still arrived as a major presence in terms of people’s efforts to change the social environment surrounding traditional investing. The capital raised takes on several different forms, among them:

 

  • Debt
  • Working Capital
  • Lines of Credit
  • Loan Guarantees
  • Equity and More

 

The types of investments being made involve clean technology, microfinance, and community development finance. The emphasis is to invest in products, techniques, and services that make a positive change for people and/or the environment, depending on the given investment’s focus. Thanks to the renewed emphasis on such matters, companies around the world now take Impact Investing seriously, as it is a legitimate, growing source of cash flow which can be used to expand their products and services. Plus, it offers the benefit of giving companies a chance to be on the right side of public opinion when it comes to important matters.

Note: This form of investing should not be confused with crowdfunding, which is also becoming quite popular. While crowdfunding may be associated with positive causes and nonprofit organizations, it is not a true form of impact investing, or investing in general. The benefits of crowdfunding flow to the funding parties in terms of new products and rewards, and to the funding recipients in terms of capital – but that’s different from a classic investment model, in which profitability drives all participants’ cash flow.  

Why It Matters?

Impact Investing matters for many reasons, but perhaps the most important one is that it seeks to spur positive change in a productive and even profitable manner, not only on a per-company basis, but in the investment marketplace on the whole.

Impact Investing is a means of bringing positive change to social and environmental policies and behavior by working within the market itself. This is an alternative to an environment wherein companies are engaged in protracted confrontations which may cause a net loss of jobs, new resources, or new sites.

Instead, the focus is on using the money invested to create safer and more socially conscious means of developing businesses, thereby increasing not only the bottom line, but the number of employees. Plus, those who embrace Impact Investing end up with improved profiles. It looks good for them both internally (in terms of the company culture) and externally (in terms of marketing and public relations).Another plus for those who are considering this form of investing is that it is available to a broad range of investors, including those who may only have a small amount to invest (Triodos Bank, 2014). Funds may be combined across various Impact Investment projects, and the motive of serving the greater good stands to appeal to a form of investor who might not have participated in the very recent past.

In closing, Impact Investing is a rare and unique source of inspiration to those who might be inclined to view the investment sector as cold, profit-crazed, and/or anti-progress. Impact Investing turns the image of its own marketplace on its head. All socially- and environmentally-minded people should keep a good eye on this form of investment – if not participate in it outright.

 

 

  • Works Cited

 

Chhabra, E. (2015, March 25). Impact Investments: Becoming Popular And Making Money. Retrieved from Forbes: http://www.forbes.com/sites/eshachhabra/2015/03/25/impact-investments-becoming-popular-and-making-money/#329f3c6e345e

Emerson, J. (2016). Why Focus Our Conversation on the Nature of Value? Retrieved from Blended Value: http://www.blendedvalue.org/vision/

Global Impact Investing Network. (2016). What You Need to Know About Impact Investing. Retrieved from Global Impact Investing Network: https://thegiin.org/impact-investing/

Sullivan, P. (2010, April 26). With Impact Investing, Not Only Returns Matter. Retrieved from New York Times: http://dealbook.nytimes.com/2010/04/26/with-impact-investing-a-focus-on-more-than-returns/?_r=0

Triodos Bank. (2014). Impact investing for everyone. Retrieved from social Impact Investment: http://www.socialimpactinvestment.org/reports/Triodos-Bank-report-on-Impact-investing.pdf