Investing Basics: What is Impact Investing?

The Social Stock Exchange was established in London in 2013, with a mission to create an efficient, universally accessible marketplace where impact investors and impact businesses of all sizes can come together. Tomas Carruthers gives an overview of what Impact Investing is and why it grew rapidly in poularity

Impact investing is a dual mandate approach to investment. Impact investors don’t just want a financial return from the businesses that they invest in, they want to see a positive social impact too; think the complete opposite to the type of investing that caused the near cataclysmic credit crisis.

But it’s not about philanthropy, although philanthropists do make impact investments; it’s about investing in business that are trying to make a difference to society, but also want to financially reward the investors who back them.

Investing for impact doesn’t necessarily mean compromising your returns.

The theme has historically been popular with high net worth individuals and private equity houses, but with greater understanding what was once the playground for the rich and retired has now gone mainstream.

How do I identify Impact Investments

To qualify as an impact investment a business MUST have a stated social or environmental goal and provide evidence of the positive impact it has generated alongside the financial performance – this is important to the integrity of the impact investing market as it expands.

The social impact must be quantifiable, if it’s not it’s not an impact investment.

For instance, a micro-finance organisation looking to reduce homelessness, a social impact bond aiming to reduce recidivism, or a ‘cleantech’ firm creating a new environmental product to offset carbon emission; they must all be able to put a figure on the social impact they are looking make. This forms the basis of impact measurement and enables a target-driven assessment of the outcomes.

Where can I Find Impact Investments?

There are a number of areas for investors to consider
Classic sectors include those designed to meet basic human needs

• Agriculture
• Water
• Housing   
• Education
• Health
• Energy
• Financial services

The type of investment also offers further choice; one can invest directly in an impact enterprise, through an intermediary such as an impact investment fund, or by removing risk through acting as guarantors for example.

Impact Investing Versus Ethical Investing

The main benefits of impact investing:

• It seeks to positively include – rather than exclude – investments
• Demands that social impact is quantifiable
• Financial returns are requirement not a desire

There are other forms of ethical investment such as Socially Responsible Investing (SRI) and investing that incorporates a screening for environmental, social and corporate governance (ESG) but:

• Both often seek to exclude ‘bad’ investments rather than include businesses seeking to make a positive social impact
• Making a positive social impact is not at the core of their businesses
• Measuring social impact is not a requirement

How Reliable are Impact Business’ Social Impact Reports?

The veracity of the social impact report is the foundation on which the impact investment house has been built, as a result there is an ongoing effort across the sector to standardise impact measurement and reporting.

The Social Stock Exchange (see below) required prospective members to prepare and submit an extensive impact report before they can be considered for admission by an independent panel.

However it’s widely understood that such comprehensive approaches won’t be suitable for every business, so the way in which impact can be validated will continue to evolve with time.

Having a standardised process is of critical importance however, because it empowers organisations to self-assess and improve, encourages funding through credible reporting, and enables the mission to be projected through a clearly articulated broadcast of success. Ultimately, it leads to efficient organisations and sustainable investments, and outlines the pathway to achievement from start to finish.

From the perspective of the investor, a standardised approach is just as important, too. They need to have the ability to see how the work carried out by the organisation connects to the impact being made.

A number of global initiatives, such as the Impact Reporting and Investment Standards (IRIS) which provides standardised language and taxonomy in the field, and the Global Impact Investing Rating System (GIIRS), which acts as a third party assessor of environmental impacts by impact firms, have sought to provide common frameworks to aid analyses in this sector. It has resulted in four broad areas of evaluation:

• Use of capital – how investor money has been put to use, whether this follows its original designation, whether the intended impact was created, and how this compared to past performance.
• Impact reporting – investors require the impact performance to be reported and this must fit certain criteria such as objectivity, robustness, and detail a balance of the good and bad outcomes created.
• Future outlook – an overview of how the organisation is meeting its wider goals and whether there’s anything that can be done to improve it or the environment it operates in to better achieve its mission

Ultimately, effective measurement and reporting creates useful targets for the organisations and the investors assessing them, and leads to useful feedback to drive efficiency and improvements.

One response to “Investing Basics: What is Impact Investing?”

1. DIY Investor - The Do-It-Yourself Investing Blog says:

   June 26, 2018 at 11:06 am

   […] Investors determined to ‘do good whilst doing well’ will need to do their homework when it comes to really understanding the ambitions and machinations of funds variously promoting ESG investing,  socially responsible investing (SRI) or impact investing. […]

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