Impact investment seeks to deliver positive social and/or environmental benefits alongside financial returns, by providing capital to organisations that develop products and services or use their operational infrastructure to make a positive difference to society.
How does impact investment work?
In impact investment, just like mainstream investment, financial capital is invested in a company with the expectation of financial return. However, at the same time, a commitment is made to specify and measure the social and/or environmental impact created through the investment. The impact investment market encompasses a diverse array of organisations and practices.
The term ‘impact investing’ has been in circulation since around 2007. It was once referred to as a new asset class, but is now thought of as a strategy that can be used in relation to multiple different types of capital. Advocates of impact investing consider it to be distinct from related activities like Responsible Investment (RI) and ESG Investing (which considers environmental, social and governance factors of the investment supply chain), on the basis that these forms of investment do not deliberately target certain forms of impact, nor measure them.
A landmark in the development of impact investing was the dedication of the UK’s 2014 presidency of the G8 to the development of social impact investing. This provided a platform for international engagement on the main principles and practices of this emerging field. Since then, a Global Steering Group has been set up, which works to establish National Advisory Boards (NAB) in countries across the world. There are now 16 NABs globally. Several sector bodies have been set up to help build the market, such as the Global Impact Investing Network (GIIN).
It continues to be a challenge to define exactly what counts as impact investing, and it is taking time for substantial data sets to be developed that give an accurate picture of the scale of impact investing globally. The GIIN’s 2018 Annual Impact Investor Survey provides a benchmark: it identifies over US$ 228 billion managed by 229 organisations.
Given its nature as a strategy across multiple forms of capital, there is no one way of doing impact investing. Just like conventional investing, different types of investments entail different relationships between investor and investee.
For example, some investors make debt-based investments to large numbers of companies and have relatively low levels of engagement with any individual borrower. In contrast, investors using a private equity model become very involved in the running of the company, often joining the Board and requiring regular reporting of progress across financial and impact key performance indicators (KPIs).
The recipients of impact investment can take almost any form, from charities through to for-profit businesses. Expected returns also vary across the impact investing market. Some investors choose to target market-rate returns alongside impact. Others target lower rates of return. These decisions reflect the kinds of impact being targeted, as well as the mission of the organisation holding the capital, and institutional requirements or responsibilities such as fiduciary duty.
Unsurprisingly, given this level of variation in what impact investment activity looks like, there is also considerable variation in the systems that investors and investees create to measure and manage impact. Work is ongoing, through initiatives such as the Impact Management Project, to consolidate approaches to capturing impact data and using it to inform decision-making
More on how impact investment works and about Nesta’s (National Endwoment for Science, Technology and the Arts) work can be found here (including two case studies).