Impact investing
Encyclopedia
Impact investing refers to investments made based on the practice of assessing not only the financial return on investment
, but also the social and environmental impacts of the investment that happen in the course of the operations of the business and the consumption of the product or service which the business creates. An impact investor seeks to enhance social structure or environmental health as well as achieve financial returns.
The investor may take an active role mentoring or leading the growth of the company, similar to the way a venture capital
firm assists in the growth of an early-stage company. Impact investors follow an investment strategy in which positive social screening criteria are an integrated component of the investment process, whereas the term socially responsible investing
may include negative screening criteria in the investment decision.
to express their values, usually by avoid investing in specific companies or activities with negative effects. In the 1990s, Jed Emerson advocated the blended value
approach, for foundations' endowments to be invested in alignment with the mission of the foundation, rather than to maximize financial return, which had been the prior accepted strategy.
Simultaneously, approaches such as pollution prevention
, corporate social responsibility
, and triple bottom line
began to measure non-financial effects inside and outside of corporations. In 2000, Baruch Lev of NYU Stern School of Management pulled together thinking about intangible assets in a book by the same name, which furthered thinking about non-financial effects of corporate production.
Finally, around 2007, the term "impact investment" emerged, an approach that deliberately builds intangible assets alongside tangible, financial ones.
The number of funds engaged in impact investing has grown quickly in the last five years, and a 2009 report from the Monitor Group
, a research firm, estimated the impact investing industry could grow from its present $50 billion or so in assets to $500 billion in assets within the next decade. This capital may be in a range of forms including equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology. Its growth is partly in response to criticism of traditional forms of philanthropy
and international development
, which have been characterized as unsustainable and driven by the goals - or whims - of the donors.
Many development finance institution
s such as the British Commonwealth Development Corporation
or Norwegian Norfund
can also be considered impact investors, because they allocate a portion of their portfolio to investments that deliver financial as well as social or environmental benefits.
Impact investments are structured similarly to those in the rest of the venture capital
community. In addition, other types of investment mechanisms are emerging through crowd-sourced investment and debt financing.
Finally, impact investment is typically made in a for-profit enterprise, but new enterprise structures are emerging.
Return on investment
Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
, but also the social and environmental impacts of the investment that happen in the course of the operations of the business and the consumption of the product or service which the business creates. An impact investor seeks to enhance social structure or environmental health as well as achieve financial returns.
The investor may take an active role mentoring or leading the growth of the company, similar to the way a venture capital
Venture capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
firm assists in the growth of an early-stage company. Impact investors follow an investment strategy in which positive social screening criteria are an integrated component of the investment process, whereas the term socially responsible investing
Socially responsible investing
Socially responsible investing , also known as sustainable, socially conscious, or ethical investing, describes an investment strategy which seeks to consider both financial return and social good....
may include negative screening criteria in the investment decision.
Background
Historically, regulation - and to a lesser extent, philanthropy - was an attempt to minimize the negative social consequencies of business activies. But there is a history of individual investors using socially responsible investingSocially responsible investing
Socially responsible investing , also known as sustainable, socially conscious, or ethical investing, describes an investment strategy which seeks to consider both financial return and social good....
to express their values, usually by avoid investing in specific companies or activities with negative effects. In the 1990s, Jed Emerson advocated the blended value
Blended value
Blended value refers to a business model that combines a revenue-generating business with a component which generates social-value. The term is usually attributed to Jed Emerson, and sometimes used interchangeably with triple bottom line and social enterprise...
approach, for foundations' endowments to be invested in alignment with the mission of the foundation, rather than to maximize financial return, which had been the prior accepted strategy.
Simultaneously, approaches such as pollution prevention
Pollution prevention
Pollution prevention ' describes activities that reduce the amount of pollution generated by a process, whether it is consumer consumption, driving, or industrial production...
, corporate social responsibility
Corporate social responsibility
Corporate social responsibility is a form of corporate self-regulation integrated into a business model...
, and triple bottom line
Triple bottom line
The triple bottom line captures an expanded spectrum of values and criteria for measuring organizational success: economic, ecological, and social...
began to measure non-financial effects inside and outside of corporations. In 2000, Baruch Lev of NYU Stern School of Management pulled together thinking about intangible assets in a book by the same name, which furthered thinking about non-financial effects of corporate production.
Finally, around 2007, the term "impact investment" emerged, an approach that deliberately builds intangible assets alongside tangible, financial ones.
Market Size
The number of funds engaged in impact investing has grown quickly in the last five years, and a 2009 report from the Monitor Group
Monitor Group
Monitor Group is a global management consulting firm headquartered in Cambridge, Massachusetts, United States and with 27 offices in 26 major cities around the world. It provides strategy consultation services to the senior management of organizations and governments...
, a research firm, estimated the impact investing industry could grow from its present $50 billion or so in assets to $500 billion in assets within the next decade. This capital may be in a range of forms including equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology. Its growth is partly in response to criticism of traditional forms of philanthropy
Philanthropy
Philanthropy etymologically means "the love of humanity"—love in the sense of caring for, nourishing, developing, or enhancing; humanity in the sense of "what it is to be human," or "human potential." In modern practical terms, it is "private initiatives for public good, focusing on quality of...
and international development
International development
International development or global development is a concept that lacks a universally accepted definition, but it is most used in a holistic and multi-disciplinary context of human development — the development of greater quality of life for humans...
, which have been characterized as unsustainable and driven by the goals - or whims - of the donors.
Many development finance institution
Development Finance Institution
Development finance institution is generic term used to refer to a range of alternative financial institutions including microfinance institutions, community development financial institution and revolving loan funds...
s such as the British Commonwealth Development Corporation
Commonwealth Development Corporation
The Commonwealth Development Corporation, now known as CDC Group plc, is a British development organisation owned by the UK Government...
or Norwegian Norfund
Norfund
Norfund is a private equity company established by the Norwegian Storting in 1997 and owned by the Norwegian Ministry of Foreign Affairs. The fund receives its investment capital from the state budget...
can also be considered impact investors, because they allocate a portion of their portfolio to investments that deliver financial as well as social or environmental benefits.
Impact Investment Mechanisms
Impact investments are structured similarly to those in the rest of the venture capital
Venture capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
community. In addition, other types of investment mechanisms are emerging through crowd-sourced investment and debt financing.
- IndiegogoIndiegogoIndieGoGo is a crowd funding site founded by Slava Rubin, Danae Ringellmann and Eric Schell in 2008. Its headquarters are in San Francisco, California...
- KickstarterKickstarterKickstarter is an online threshold pledge system for funding creative projects. Kickstarter has funded a diverse array of endeavors, ranging from indie film and music to journalism, solar energy technology and food-related projects.-Model:...
- KivaKivaA kiva is a room used by modern Puebloans for religious rituals, many of them associated with the kachina belief system. Among the modern Hopi and most other Pueblo peoples, kivas are square-walled and underground, and are used for spiritual ceremonies....
Finally, impact investment is typically made in a for-profit enterprise, but new enterprise structures are emerging.
- B Corporation
Impact Investment Funds
- Acumen FundAcumen FundAcumen Fund is a non-profit global venture fund that uses entrepreneurial approaches to solve the problems of global poverty. Its aim is to help build financially sustainable and scalable organizations that deliver affordable critical goods and services that improve the lives of the poor...
- Grassroots Business FundGrassroots Business FundThe Grassroots Business Fund is a non-profit based in Washington, DC. It has field offices in Ghana, Kenya, and India. Their mission is to build and support high-impact enterprises that provide sustainable economic opportunities to thousands of people at the base of the economic pyramid...
- Small Enterprise Assistance FundsSmall Enterprise Assistance Funds- SEAF International Funds :Below is a list of SEAF’s funds and the countries in which they operate:- Central and Eastern European Funds :* Caresbac Polska** Poland* Baltics Small Equity Fund ** Estonia** Latvia** Lithuania* SEAF Macedonia...
- Bridges Ventures
- Hub Ventures
Conferences
- Take Action! The Impact Investing Conference
- "SoCap"
- [Greener Minds]
- [Sustainable Brands]
Metrics, Standards, and Data
- GIIRS
- HIP Metrics
- B Corporation
- ISO 26000ISO 26000ISO, the International Organization for Standardization, has launched an International Standard providing guidelines for social responsibility named ISO 26000 or simply ISO SR and was released on 1 November 2010.-Guidance without certification:...
- ESG Data Feeds
- Triple Bottom LineTriple bottom lineThe triple bottom line captures an expanded spectrum of values and criteria for measuring organizational success: economic, ecological, and social...
See also
- Double bottom lineDouble bottom lineDouble bottom line is a business term used in socially responsible enterprise and investment.While all businesses have a conventional bottom line to measure their fiscal performance—financial profit or loss—enterprises which seek a second bottom line look to measure their performance in...
- FairPensionsFairPensionsFairPensions is a registered charity that promotes responsible investment bypension schemes and fund managers. It is based in London, United Kingdom....
- Socially responsible investingSocially responsible investingSocially responsible investing , also known as sustainable, socially conscious, or ethical investing, describes an investment strategy which seeks to consider both financial return and social good....
- Social Return on InvestmentSocial Return on InvestmentSocial Return on Investment is a principles-based method for measuring extra-financial value relative to resources invested...
- Triple bottom lineTriple bottom lineThe triple bottom line captures an expanded spectrum of values and criteria for measuring organizational success: economic, ecological, and social...
External links
- Impact Investments: An Emerging Asset Class J.P. Morgan and Rockefeller Foundation report on the impact investment industry
- Innovations journal - Impact Investing - Volume 6, Issue 3 of MIT Press's Innovations Journal was devoted to the subject of impact investing