Impact investing is characterised by several key features that distinguish it from traditional investment approaches. The main elements of impact investing include:
1. Intentionality
Impact investing is purpose-driven. Investors intentionally set out to generate positive and measurable social and environmental outcomes, whilst generating financial returns. The primary goal is to make a meaningful difference.
2. Measurable Impact
Impact investments have measurable, quantifiable and transparent outcomes. Investors set clear objectives and then assess the impact of their investments using specific metrics. For example, impact investors might assess for impact on targets like: reduced carbon emissions, improved access to education, or increased job opportunities in underserved communities.
3. Expected Returns
Like traditional investments, impact investments involve an assessment of risk and return. Impact investors expect a financial return on their investment, or at minimum, a return of capital. The risk-return profile varies depending on the specific impact investment. Typically, returns range from slightly below market (sometimes called concessionary) to market rate returns.
4. Intentional Investment Selection
Impact investors intentionally select investments that align with their values and objectives. They consider the potential for impact as a fundamental criterion in their investment decision-making process.
5. Impact Measurement and Reporting
Transparency and accountability are essential elements in impact investing. Investors and organisations are committed to monitoring and reporting on the social and environmental impact of their investments. This allows for ongoing evaluation and adjustment to maximise positive outcomes. Transparency also allows the Impact ‘Industry’ to build out global reporting standards, healthy benchmarking and robust data sets quickly.
6. Long-Term Perspective
Unlikely some other forms of investing, impact investing typically has long-term timeframes. Investors understand that the full benefits of their investments may take time to materialise, especially when tackling complex issues like poverty alleviation or climate change.
7. Scaling Impact
Impact investors aim to scale their impact over time, contributing to broader, system-wide change. By influencing industries and policies, they can have a lasting and substantial effect.
8. Active Engagement
Impact investors often play an active role in supporting and shaping the organisations and projects in which they invest. This involvement can include providing strategic guidance, mentorship, and resources to help the ventures succeed in achieving their social and environmental goals.
9. Focus on Underserved or Impactful Sectors
Impact investing frequently targets sectors and industries with significant social or environmental challenges. These may include areas such as clean energy, affordable housing, healthcare, education, and microfinance, where investments can lead to substantial improvements in quality of life.
In this way, impact investing is closely linked to the UN’s 17 Sustainable Development Goals (SDGs).
10. Collaboration
Impact investors often collaborate with various stakeholders, including governments, nonprofits, and other investors, to amplify their efforts and create a more significant and sustainable impact.
11. Financial Inclusion
Impact investing can facilitate financial inclusion by providing access to investment opportunities for individuals and communities who may not have participated in traditional financial markets.
12. Range of Asset Classes
Impact investments are not limited to a particular asset class. They can encompass a diverse set of financial instruments, including stocks, bonds, cash equivalents, private equity, real estate, and venture capital, among others.
13. Risk Mitigation
While impact investments may carry inherent risks, investors often use strategies to mitigate these risks. This can include diversifying their portfolio, conducting thorough due diligence, and employing financial instruments that offer protection.
Unlocking the power of Impact Investing
Impact investing represents a paradigm shift in the world of finance, where the pursuit of financial returns converges with the desire to create meaningful, measurable, and lasting change.
As impact investing gains momentum, it promises a more sustainable, inclusive, and responsible approach to investing. And, by understanding and embracing the key elements of impact investing, investors can play a pivotal role in shaping a future where profitability and positive impact coexist. In this transformative journey, the possibilities are limitless, and the rewards are both financial and profound.
