Impact investments are investments that are made with the intent to generate and measure both a social and a financial return. Impact investment covers a wide range of social and environmental issues with different investors and intermediaries focusing on a subset of these issues depending on their priorities and contexts. In the case of international development, these investments are targeted at enterprises that benefit poor people as consumers, producers, suppliers or employees.
“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 upon the circumstances.”
“Social Impact Investments are those that intentionally target specific social objectives along with a financial return and measure the achievement of both.”
Core characteristics of impact investing
Impact investment is diverse, but the GIIN has defined four characteristics that help define it:
Intentionality – The intent of the investor to generate social and/or environmental impact through investments is an essential component of impact investing. These investments are made into enterprises and funds that expand access to critical goods and services, and/or generate positive impact through their operations. For example, investors may seek to use investments to increase access to financial services, education, healthcare, affordable housing or quality employment by underserved populations. Investors may also invest in solutions aimed at mitigating the negative effects of climate change and environmental degradation. Investor activities may be focused in developed or emerging markets, or both.
Investment with return expectations – Impact investments are expected to generate a financial return on capital and, at a minimum, a return of capital. While grants are not themselves impact investments, they can play an important role in enabling impact investing – for instance, through incubating early-stage business models, providing certain forms of credit enhancement, providing technical assistance, or funding needed research and development.
Range of return expectations and asset classes – Impact investments generate returns that range from below market (sometimes called concessionary) to risk-adjusted market rate. Impact investments can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital and private equity. Impact investors may also earn fees through the provision of catalytic instruments such as guarantees. Investors’ return expectations and the instrument(s) in which they invest reflect their intent and are typically driven by the economics of the investment. For instance, some may wish to support higher risk early-stage social enterprises in challenging markets or invest pursuant to various regulatory mandates, often with concessionary returns; others may choose to finance the expansion of proven business models to reach scale or invest in credit enhanced transactions, in the expectation of market or near market rate returns.
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. Impact measurement helps ensure transparency and accountability, and is essential to informing the practice of impact investing and building the field.
Investors’ approaches to impact measurement will vary based on their objectives and capacities, and the choice of what to measure usually reflects investor goals and, consequently, investor intention. In general, components of impact measurement best practices for impact investing include:
- Establishing and stating social and environmental objectives to relevant stakeholders
- Setting performance metrics/targets related to these objectives using standardized metrics wherever possible
- Monitoring and managing the performance of investees against these targets
- Reporting on social and environmental performance to relevant stakeholders