Joan Trant, TriLinc Global looks at a number of attributes associated with the concept of Impact Investing, investment for both a financial return and social/environmental impact too.
Impact investing is a strategy that intentionally aims to generate both a financial return and positive, measurable social and/or environmental impact. It is a lens through which investors consider investment options across asset classes, and a process by which investment managers conduct due diligence, monitor, evaluate and report on investments. In an attempt to add clarity to the concept of Impact Investing, we’ve identified seven key attributes below:
1. Investing intentionally to achieve both a financial return and positive impact
Impact investing actively pursues positive societal change using the capital markets rather than philanthropy.
2. Active measurement of financial return and positive impact value
Because impact investments are made with the specific intent to achieve social or environmental goods, the impact investment manager has the responsibility to actively measure and monitor the impact of its investments and report findings to investors.
3. Investors seeking broad range of impact outcomes and financial returns
Impact investing returns fall along the spectrum of concessionary or below market rate returns, market rate returns and premium returns. Impact investing is commonly categorised as either “financial first” or “impact first,” based on the primary goal of the investment. Financial first investors target market rate or premium returns, while impact first investors prioritise social or environmental outcomes over financial results.
4. Not mutually exclusive with fiduciary responsibility
Impact investing does not conflict with fiduciary responsibility if it avoids trade-offs between impact outcomes and financial performance. Furthermore, it may contribute to portfolio quality through risk mitigation and long-term value creation.
5. Not to be confused with socially responsible investing
Impact investing is fundamentally different from socially responsible investment (SRI). SRI primarily employs negative screening (although some SRI managers engage in shareholder activism), so that investors don’t invest in companies whose profit-generating activities produce negative social or environmental outcomes. In contrast, impact investing deploys capital in companies that actively seek positive social and environmental benefits in addition to profit. Beyond avoiding companies that do harm, impact investing leverages the private sector to help solve pressing challenges affecting people and planet.
6. Various players form the impact investing ecosystem
The impact investing ecosystem comprises capital providers, impact investing funds, social entrepreneurs, companies committed to social and environmental progress, intermediaries, advocacy and capacity development groups and government entities. Each plays a vital role to develop and scale the industry.
7. Fast growing and timely investment approach
Impact investing is an established and expanding strategy in the global capital markets, driven by investor disillusion over the global financial crisis, unmet needs and the Next Generation’s expectations regarding the role of business in society. The Great Recession has highlighted the risks of financial returns without social value. As the world population continues to grow exponentially, there is increasing demand for land, energy, food, water, health care, education and housing, as well as non-essential consumer goods.
Accompanying this phenomenon, $41 trillion is expected to transfer from Baby Boomers to more socially-conscious Millennials, who are the next investors, job seekers and consumers. This emerging generation has signalled that it expects companies to improve society in addition to generating profits
About the Author - Joan Trant is Director of Marketing & Impact at TriLinc Global. For more information visit www.trilincglobal.com