What is impact investing?
Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals. The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
What are the core characteristics of impact investing?
The practice of impact investing is further defined by the following four core characteristics:
INTENTIONALITY An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing.
INVESTMENT WITH RETURN EXPECTATIONS Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.
RANGE OF RETURN EXPECTATIONS AND ASSET CLASSES Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.
IMPACT MEASUREMENT A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.
Why impact investing?
Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns. The impact investing market offers diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns.
Many types of investors are entering the growing impact investing market. Here are a few common investor motivations:
How big is the impact investing market?
Impact investing is a relatively new term, used to describe investments made across many asset classes, sectors, and regions. As a result, the market size has not yet been fully quantified. However, the aggregate assets noted below indicate that the market is substantial, with significant potential for growth. In May 2017, the GIIN published its seventh edition of its annual impact investor survey and reported that collectively, the 208 respondents managed $114bn in impact assets with 205 of these investors committing $22bn more in 2017 than in 2016 to impact assets.
How do impact investments perform financially?
Impact investors have diverse financial return expectations. Some intentionally invest for below-market-rate returns, in line with their strategic objectives. Others pursue market-competitive and market-beating returns, sometimes required by fiduciary responsibility. Most investors surveyed in the GIIN's 2017 Annual Impact Investor Survey pursue competitive, market-rate returns. Respondents also report that portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.
What are Impact Reporting Investment Standards (IRIS)?
IRIS is the catalog of generally accepted performance metrics that leading impact investors use to measure social, environmental, and financial success, evaluate deals, and grow the sector’s credibility.
What is blended finance?
Blended finance uses catalytic capital from public or philanthropic sources to increase private sector investment in emerging markets for global development impact. With support from public investors (such as first-loss capital or guarantees), private investors benefit from lower risk and/or enhanced returns on their investments in emerging and frontier markets. Meanwhile, public investors can magnify the impact of their funding – initial estimates suggest that public capital used in these transactions can attract up to 10x in private investment.
There is an estimated $2.5 trillion gap in funding per year for the Sustainable Development Goals (SDGs). As a result, governments, donor agencies, and philanthropists are looking for more catalytic ways to deploy capital to close this gap. At the same time, private investors are increasingly seeking new investment opportunities in high-growth emerging and frontier markets. At the intersection of these two trends is the blended finance opportunity. Blended finance transactions in Emerging and Frontier Markets have the potential to unlock billions of private sector dollars for global development.