Impact Investing
What is Impact Investing?
Impact investing empowers individuals to take control of their wealth as a consistent extension of their identity and values.
Impact investments fund companies and organizations that generate social and/or environmental good along with financial return.
“If in the 19th century and before investors measured financial return, and in the 20th century they measured risk and return, [then in] the 21st century, we’re already measuring risk, return, and impact.” -Sir Ronald Cohen
Fields of Impact Investing
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Socially responsible investments (SRIs) - investments that are expected to do no harm. At a minimum, they have been screened to avoid investing in companies that are causing negative impacts to our environment or to society. SRIs investment in companies that adhere to good environmental, social, and corporate governance (ESG) practices. SRI Investors can earn the same financial return as a traditional investor.
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Mission-related investments (MRIs) - investments made with the goal of having a positive impact while also generating a financial return. MRIs are typically funded by foundation endowments.
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Program-related investments (PRIs) - investments that have a charitable intent as their primary purpose, with financial returns as a secondary goal.
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Measuring Impact
Impact investors are aligning and measuring their investments to the UN Sustainable Development Goals (SDGs), a collection of the 17 most pressing challenges societies are facing related to poverty, inequality, environmental degradation, prosperity peace and justice. These 17 goals further promote impact-tracking, increasing companies’ credibility and performance.
Direct Impact Investments
David Brooks, a New York Times columnist, highlights developments in direct impact Investing in an article entitled, “How to Leave a Mark”:
“Impact investors seek out companies that are intentionally designed both to make a profit and provide a measurable and accountable social good. Impact funds are frequently willing to accept lower financial returns for the sake of doing good — say a 7 percent annual return compared with an 11 percent return. But some impact investors are seeking to deliver market-rate returns.”
Social Impact Bond
A social impact bond (SIB) is a contract with the public sector or governing authority, whereby it pays for better social outcomes in certain areas and passes on part of the savings achieved to investors. A social impact bond is not a bond, per se, since repayment and return on investment are contingent upon the achievement of desired social outcomes; if the objectives are not achieved, investors receive neither a return nor repayment of principal. SIBs derive their name from the fact that their investors are typically those who are interested in not just the financial return on their investment, but also in its social impact.
A Social Impact Bond in Practice
In 2011, Peterborough Prison in the United Kingdom issued one of the first social impact bonds anywhere in the world. The bond raised 5 million pounds from 17 social investors to fund a pilot project with the objective of reducing re-offending rates of short-term prisoners. The relapse or re-conviction rates of prisoners released from Peterborough will be compared with the relapse rates of a control group of prisoners over six years. If Peterborough's re-conviction rates are at least 7.5% below the rates of the control group, investors receive an increasing return that is directly proportional to the difference in relapse rates between the two groups and is capped at 13% annually over an eight-year period.
Investing Across Asset Classes
Impact Investments are very broadly defined to include venture investments, microfinance loans, social impact bonds, and private equity funds. While Impact Investment activity is expected to continue to grow dramatically over the coming decade, the broad array of options and the lack of clear definitions and metrics currently present an obstacle to achieving this growth.
The Harvard Business Review article entitled “Making Sense of the Many Kinds of Impact Investing” suggests a framework for evaluating social and financial risks and opportunities associated with potential impact investments.