What is impact investing? How does it work? Well, if you want to make a difference even as you make that profit, impact investing is the way to go.
As times change, so do how companies and individuals are conducting their business. More and more business entities are heading the call for increased social responsibility and environmental protection.
Investors have also changed their tactics. Instead of running only after profits, many investors now want to make an impact. People want to put their money into companies that can bring positive social change and preserve the environment, while still generating profits.
So, if you are thinking about making a positive change with your money, impact investing is the answer.
- But exactly what does impact investing truly mean?
- Is it focused on financial returns?
- Do impact inveestors really work to bring social and environmental benefits to society?
If you are new to impact investing, here is everything you should know.
Table of Contents
- What is Impact Investing?
- What is Environmental, Social, and Governance (ESG) Investing?
- What is Social Impact Investing?
- What are Social Impact Investments?
- Comparing Social Impact Investors to Socially Responsible Investing
- What is an Impact Investment Fund?
- What is Non-Profit Impact Investing?
- What is an Impact Investing Strategy?
- Types of Impact Investing Strategies
- Program-Related Investments (PRIs)
- Mission Related Investments (MRIs)
- How to Deploy an Impact Investing Strategy
- Things to Know About Impact Investing
- The Impact Investing Market is Big
- Impact Investing Requires a Cause
- Expect Financial Returns
- Get Involved
- Invest Wisely
- Talk to a Financial Advisor
- What is the Minimum Investment for Impact Investing?
- What Investment Platform Can You Use?
- BlueOrchard Finance S.A.
- Vital Capital Fund
- Community Reinvestment Fund
- Triodos Investment Management
- Which is the Lowest Cost Investment Platform?
- Are There Any Investment Platforms to Avoid?
- Is Impact Investing Profitable?
- What is the Future of Impact Investing?
- What Are the Risks of Impact Investing?
- Related Resources
What is Impact Investing?
The impact investing definition is quite broad. The whole point of investing is to get a financial return after a set period. However, as the world grows more socially and environmentally conscious, there’s an increasing demand for this to reflect in investing.
All this has resulted in the growth of impact investing. You invest your money expecting a return but only on products with a social and environmental impact on the world.
The good news is you can invest in developed or emerging economies just as long as you adhere to this principle. Though this is a relatively new concept, it’s growing in popularity as many people search for more positive investments.
Industries such as renewable energy and sustainable agribusiness are excellent investment alternatives. This is because their goal is to benefit the planet. They employ ESG practices to ensure they make profits and bring about positive social and environmental impact.
What is Environmental, Social, and Governance (ESG) Investing?
ESG investing is a short form for Environmental, Social, and Governance practices. These practices can apply to impact investing by influencing the outcome of the investment you make.
Traditional investing relied on technical valuations to determine the outcome of investments. Now, ESG practices can have a similar impact by noting opportunities and risks. However, how the investments perform financially is still the primary plan.
ESG scores are one way to evaluate how a particular product will possibly perform. Those with a higher score will align with your goals as well as potentially outperform market-rate financial returns, and those with a lower one limit the outcome.
ESG Impact Investing aligns the two concepts to create products that many eco-conscious people want. These tend to have a more positive impact while giving a financial return on the investment.
What is Social Impact Investing?
When you think about social investing, know its main focus is people. It’s about creating policies that make people better in terms of improving their skills and capabilities.
The investment focuses on primary areas like health care, education, childcare, and employment search, among others. As issues such as unemployment and poverty rage on, social impact investing seeks ways to change this.
For instance, you can focus on investing in young people to gain more skills and fill in the widening age gap among the working class. The more opportunities people have, the better the outcome. There are different ways to address such issues other than relying on financial aid.
Through ESG investing, investors can turn a profit and help tackle the issues of environmental sustainability and corporate social responsibility. This creates a new way of thinking and diverse opportunities that benefit the planet.
This form of investing is generally known to focus on a mutual fund or investing in particular stocks that meet your environmental, social, and governance criteria.
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What are Social Impact Investments?
Social impact investments are a type of investment that channels funds to organizations that are tackling social issues. The expectation is to gain financial returns but also have a positive impact on these matters.
Such impact investments make it possible to effect positive change and also earn a profit. The outcome is a better life for the people impacted by the social matter.
For instance, you can invest in a company addressing poor education and skills training among the youth. Such a company offers young people opportunities but still turns a profit for its investors. This symbolizes the change that’s happening in the world today.
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Comparing Social Impact Investors to Socially Responsible Investing
When you think about social impact investing, it’s important to understand it is not the same as socially responsible investing (SRI).
Socially responsible investing has been around for a while and is considered more traditional. It focuses on avoiding companies with unethical practices like those involved in weapons manufacturing or tobacco production. It’s commonly also referred to as ethical investing.
Impact investing is more forward-thinking and proactive. It’s about finding companies that are making a positive impact on social and environmental outcomes. You’ll end up focusing on this part first rather than financial performance.
Here’s a quick comparison of the two:
- Socially responsible investing is optimizing to companies that align with your social or environmental benefits as well as avoiding companies that do not align with your investment practices. Impact investing is about finding and supporting mission-related investments that drive positive social and environmental impact.
- Socially responsible investing places a bit more weight on financial performance. Impact investing is about placing more focus on a positive social and environmental impact alongside the placement of investment dollars.
- Socially responsible investing can rely heavily on historical impact measurement of the social and environmental performance of companies. Impact investing may place a bit more weight on the future impact measurement and deployment of social and environmental performance.
- Socially responsible investors tend to be institutional investors that need to focus a bit more on financial return given they are deploying money from pension funds. Socially responsible investors are still driving positive change. Comparing this to an impact investor, which tends to be venture capital or private equity money, they are known to be more patient capital with a focus on equity investments across a variety of asset classes.
The bottom line is that social impact investing is a more proactive way to invest in companies that are making a positive difference in the world. It’s a way to create change and support businesses that are working towards a better future.
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What is an Impact Investment Fund?
Impact investing funds pool together finances from several impact investors to buy securities. However, every impact investor retains ownership rights over their shares.
The whole purpose of creating an impact investment fund is to have a better chance of picking top investment opportunities.
Additionally, impact investors, in this case, gain from better funds management and are charged a smaller investment fee.
What is Non-Profit Impact Investing?
Impact investing non-profit channels its funds to specific non-profit organizations. The aim is to make a return while enacting social change.
The investments end up being purposeful with positive social and environmental impacts. Each non-profit must have social goals and missions that drive it. Investors stay away from companies seen as harming the world.
Impact investing non-profits raise money for different charities in the form of investment. These charities must have social goals and missions and a plan to generate returns for the investors.
The returns are recycled by the non-profit to invest in other charities in the future.
What is an Impact Investing Strategy?
The impact investing strategy requires risk mitigation, impact maximization, and target returns achievement. The only way the strategy will work is to adhere to all three and do them correctly.
Impact investors have some level of risk they are comfortable with when an opportunity to earn a return emerges. It’s not a manageable undertaking, but it’s also what attracts many people to impact investing.
The outcomes expected have a positive impact on expected financial returns.
However, a strategy is necessary to help strike a balance between risk and financial return. At the same time, the strategy ensures the enterprise reaches the set intent.
Types of Impact Investing Strategies
Impact investing may be funded in a variety of forms and vehicles, and it is also accessible to individuals of all net worth levels.
Impact investments provide investors the opportunity to invest in a range of assets in order to estimate their potential return on impact. Impact investment has two components: a positive and measurable impact as well as an economic return.
Impact investors come in a variety of forms so there is no one investment strategy that takes precedent over others.
Program-Related Investments (PRIs)
Program-Related Investments, or PRIs, are a type of impact investing that is typically made by foundations and philanthropic organizations. PRIs are investments made with the intention of achieving a social or environmental impact, in addition to a financial return.
PRIs can take a variety of forms, including loans, equity investments, and grants. PRIs are typically made for organizations that may have difficulty accessing traditional financing.
PRIs often come with flexible terms, such as below-market-rate returns or longer repayment periods. This flexibility allows PRI recipients to invest more of their resources in their programs and services, rather than on loan repayments.
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Mission Related Investments (MRIs)
If you’re thinking about mission-related investments (MRIs), it’s important to know that mission investing is risk-adjusted, market-rate investments made as part of a foundation’s endowment.
They are made with the intention of having a positive social impact and often help the foundation secure its long-term financial stability and growth. MRIs can be a great way to invest in causes you care about while also earning a financial return on your investment.
When considering an MRI, it’s important to do your research to ensure that the organization aligns with your personal mission and values. It’s also important to remember that MRIs are subject to the same risks as any other investment, so there is always the potential for loss.
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How to Deploy an Impact Investing Strategy
Once you decide to start on impact investing, there are many impact investing firms you can work with. It can be a great way to make your charitable donations work and earn a financial return from the investment.
Start by picking organizations that champion the causes dear to your heart. Narrowing down the social impact helps you have a better outlook as you invest.
Impact investing requires clarification on personal risk, set goals, and your investment preferences.
Most impact investors opt to place their money in impact investment funds that spread the risk. You can choose the companies you prefer to trade in with the help of your fund manager. For instance, pick publicly traded companies that strive to protect the environment.
But, before you start engaging in active impact investing, take some time to learn. Ask yourself, is it the right investment channel for you? Since investing is personal, it’s better to know what you’re getting into.
Some of the funds you can choose include venture capital funds that finance social enterprises, or index funds with set criteria of the companies to invest in. Understanding these different terms is crucial before you start putting in money.
Also, take time to speak with fund managers. They have ample knowledge that can help shed more light on impact investing.
Talk more about the options available to you as an impact investor. The more you ask, the clearer the matter becomes.
Impact investment offers investors returns. Just because you choose the moral high ground doesn’t mean you won’t get financial returns.
The key is to understand what it is and get financial advice then you can begin.
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Things to Know About Impact Investing
Here are a few things to know about impact investing.
The Impact Investing Market is Big
While you might be hearing about impact investing for the first time, the impact investing market is not tiny at all. The current impact investing market has deployed approximately $12 trillion of debt and equity investments in different investment funds and organizations. Impact investments are in enterprises that have social and economic benefits to the world.
It’s socially conscious investing that gives you a chance to impact and gain financial returns. Everyone can take part in impact investing, from individuals to big corporations.
Impact Investing Requires a Cause
Impact investment funds share lots of similarities with traditional funds. However, there’s the main difference worth noting. You need to pick funds that are in alignment with causes benefiting society.
For instance, if you’re passionate about affordable health care or renewable energy, invest in companies championing these causes. These can be profitable or non-profit organizations with set goals that are in line with yours.
Expect Financial Returns
When you donate towards a worthy cause like reversing climate change, you don’t expect a return. But, when you start impact investing, expect financial returns.
There is a common misconception about impact investing that it has no focus on generating financial returns. That is simply not true. The investment strategy relies first on positive and measurable impact.
The money you add to the impact investment funds isn’t a donation. But rather an investment with the potential of bringing you market-rate returns.
Many investors who venture into impact investing hope their money is going to worthy enterprises. But, the only way to be sure is to be as involved as much as possible.
It’s better to speak with the fund manager and investment advisor rather than follow friends. The fund manager can break down where your funds go, and you can conduct more research about the different non-profits and companies.
Just like traditional investing, impact investments carry risk. There’s no guarantee on a return on your investment so put in money you can afford to lose.
Take time to evaluate your funds and learn as much as you can about impact investing. Only then can you take the next steps to start investing.
Talk to a Financial Advisor
Once you start researching impact investing, talk to a financial advisor. They can help you understand the risks and returns of different funds. And, most importantly, they can create a portfolio that’s in line with your financial expectations.
Financial advisors can also offer other services like asset management and tax planning. Consider talking to an advisor if you’re serious about impact investing.
You can also get more information by reading one of the many impact investment books available in hardcopy or on Kindle.
What is the Minimum Investment for Impact Investing?
While the amount differs between platforms, most have a minimum amount of $1,000. For private equity, hedge funds, or venture capital, the minimum investment for individual investors is much higher with minimum investment commitments of $250,000.
While some traditional investment funds might offer lesser minimums, impact investing is more than just business, it offers a sense of fulfillment as your money is channeled towards a noble cause.
What Investment Platform Can You Use?
Have you exhaustively answered this question; what is impact investing? Do you know how it exactly works? If so, here are some of the best platforms, private equity, and venture capital impact investors to start your investing journey.
BlueOrchard Finance S.A.
The platform operates across the world and has its main offices in Switzerland. It provides equity and debt financing to companies that tackle world hunger and poverty.
Vital Capital Fund
This is an impact investing private equity fund that supports enterprises with a focus on sub-Saharan Africa. Their impact investing portfolios have projects geared towards improving the quality of life in these regions.
Their investment decisions are focused on improving health care, deploying renewable energy, and improving education among other social causes.
Community Reinvestment Fund
It partners with private lenders that offer to finance community development programs. The fund began in the US in 1988.
Triodos Investment Management
This is a subsidiary of the Triodos Bank and manages 12 investment funds that conduct impact investing. It began its operation in 1995 and became interested in renewable energy, education, and health care.
Which is the Lowest Cost Investment Platform?
Today, there are many impacts investing apps that you can download even on your phone. One with the lowest opening balance is Wealthsimple. It has a minimum balance of $0, but you get more packs when you have a bigger account balance.
Are There Any Investment Platforms to Avoid?
Not all impact investing firms are trustworthy. It’s better to steer clear of those that choose to withhold certain information. For instance, the causes they support and enterprises that receive the funds.
Is Impact Investing Profitable?
From a financial standpoint, it appears that impact investing may be both permanent and profitable. The impact investing industry has grown immensely over the years as a result of consumer preference as well as its profitability. This trend is expected to continue.
What is the Future of Impact Investing?
The future of impact investing is shrouded in potential. The industry has seen tremendous growth in recent years and there’s no reason to believe that this trend will reverse anytime soon.
With an increasing awareness of the importance of responsible investing, it’s likely that more and more people will want to put their money into companies and projects that are having a positive impact on the world.
This, in turn, will lead to more money flowing into the impact investing space and could help to accelerate the growth of the industry.
What Are the Risks of Impact Investing?
As with any investment, there are always risks involved. However, some experts believe that the risks associated with impact investing are relatively low. This is because most impact investments are made in established companies and projects that have a proven track record.
Of course, there is always the risk that a company or project might not achieve its desired impact, but this is something that can be mitigated through due diligence and careful selection.
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Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.
Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.
Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.
When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.