The growing appeal of impact investing proves that social change and smart investment are not mutually exclusive.
Impact investors seek to engender social and environmental change while still achieving a return on capital. Impact investments can target frontier, emerging, or developed markets. Unlike grants, the financial return can be reinvested, thereby allowing investors to maximize the positive impact of each dollar.
The Monitor Institute divides impact investors into one of two categories: financial-first investors and impact-first investors. Financial-first investors expect a market or above-market rate of return. Their primary concern is a healthy return on investment. Impact-first investors focus more on the social or environmental benefits of the venture. Financial gains are secondary to the positive impact of their investment. These investors may be willing to accept a below-market rate of return, or simply a repayment of principal, if the investment has the potential for great social change.
The term “impact investing” was first coined in 2007 by the Rockefeller Foundation. Born out of the microfinance and social enterprise movement, impact investing has grown into a multibillion dollar market over the past several years. J.P. Morgan and the Rockefeller Foundation’s Global Impact Investing Network(GIIN) expect the market to swell to $500 billion by the year 2020. Younger generations of investors, disillusioned by the global financial collapse, seem especially keen to direct private capital into socially responsible investment strategies. The long-term outlook for the impact investment market is exceptionally bright.
image credit: Blue Ocean Global Technology
Blue Ocean Global Wealth CFO, Sameer Somal, and Blue Ocean Global Technology COO, Jaspal Aulakh, share smiles with students at FORE School of Management following their skill development education session in New Delhi, India.
To qualify as an impact investment, an investment must meet certain criteria (as outlined by GIIN). These particular qualities help to differentiate impact investing from other forms of investment
- Intentionality: “The intent of the investor to generate social and/or environmental impact through investments is an essential component of impact investing.”
- Investment with Return Expectations: “Impact investments are expected to generate a financial return on capital and, at a minimum, a return of capital.”
- 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 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.”
Impact investing is sometimes viewed as a replacement or successor to philanthropic endeavors, yet the Monitor Institute and Acumen Fund prefer to think of it as a complementary practice—one more way of enacting positive change. Pierre Omidyar, founder of eBay and the Omidyar Network, believes in a collaborative approach to solving global problems:
“One of the biggest things I’ve learned in more than a decade of this work is that you really can make the world better in any sector—in nonprofits, in business, or in government. It’s not a question of one sector’s struggling against another, or of ‘giving back’ versus ‘taking away.’ That’s old thinking. A true philanthropist will use every tool he can to make an impact.”
image credit: Tech In Asia
One of Omidyar Network’s earliest investments was in Ethos Water, a bottled water company that uses a share of their proceeds to improve access to clean water in developing nations. Last year, private equity giant Bain Capital joined the impact investment market by acquiring a 50% stake in TOMS shoes, an ethical footwear company that has donated over 10 million pairs of shoes to children in need. Through this sizable investment, TOMS plans to expand its social outreach.
The Gates Foundation is another organization at the forefront of the impact investment movement. To date, they have allocated over $1 billion dollars into program-related investments, through loan guarantees, low-interest loans, and equity investments in nonprofit organizations. Earlier this year, the foundation made a $52 million dollar investment in CureVac, a pioneering biotechnology firm focused on developing low-cost drugs and vaccines for controlling the spread of infectious disease in underdeveloped countries.
This influx of private capital may even inspire smaller businesses to adopt more socially-minded business models. We have yet to see the full reverberative effect of impacting investing. The most pressing issues of our time—climate change, education, poverty, clean water, healthcare—will not be resolved by a single group of people. It will require a concerted effort from multiple sectors to expunge or mitigate these urgent global crises. Impacting investing offers a practical and sustainable way to give back to those around us.
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