Impact investing

Background

Historically, regulation—and to a lesser extent, philanthropy—was an attempt to minimize the negative social consequences of business activities.[needs reference] However, a history of individual investors using socially responsible investing to express their values exists, and such investing behavior is usually defined by the avoidance of investments in specific companies or activities with negative effects. In the 1990s, Jed Emerson advocated the blended value approach; that is, for foundations' endowments to be invested in alignment with the mission of the foundation, rather than to maximize financial return, which had been the prior accepted strategy.

Simultaneously, approaches such as pollution prevention, corporate social responsibility, and triple bottom line began as measurements of non-financial effects, both inside and outside of corporations. In 2000, Baruch Lev, of the NYU Stern School of Business, collated thinking about intangible assets in a book of the same name, which furthered thinking about the non-financial effects of corporate production.

Finally, around 2007, the term "impact investment" emerged — an approach that deliberately builds intangible assets alongside tangible, financial ones. A commitment to measuring social and environmental performance, with the same rigor as that applied to financial performance, is considered a critical, even indispensable, component of impact investing.

The Industry

The number of funds engaged in impact investing grew quickly over a five-year period and a 2009 report from research firm the Monitor Group estimated that the impact investing industry could grow from around US$50 billion in assets to US$500 billion in assets within the subsequent decade. Such capital may be in a range of forms, including equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology. The growth of impact investing is partly attributed to the criticism of traditional forms of philanthropy and international development, which have been characterized as unsustainable and driven by the goals—or whims—of the corresponding donors.

Many development finance institutions, such as the British Commonwealth Development Corporation or Norwegian Norfund, can also be considered impact investors, because they allocate a portion of their portfolio to investments that deliver financial as well as social or environmental benefits.

Impact investing is distinguished from crowdfunding sites, such as Indiegogo or Kickstarter, because impact investments are typically debt or equity investments over US$1,000—with longer-than-traditional venture capital payment times—and an "exit strategy" (traditionally an initial public offering (IPO) or buyout in the for-profit startup sector) may be non-existent. Although some social enterprises are nonprofits, impact investing typically involves for-profit, social- or environmental-mission-driven businesses.

Organizations receiving impact investment capital may be set up legally as a for-profit, not-for profit, B Corporation, Low-profit Limited Liability Company, Community Interest Company, or other designations that may vary by country. In much of Europe, these are known as 'social enterprises'.

Institutional investors

Impact investments occur across asset classes and investment amounts. Among the best-known mechanism is private equity or venture capital. "Social venture capital", or "patient capital", impact investments are structured similarly to those in the rest of the venture capital community. Investors may take an active role mentoring or leading the growth of the company, similar to the way a venture capital firm assists in the growth of an early-stage company. Hedge funds and private equity funds may also pursue impact investing strategies.

Impact investment "accelerators" also exist for seed- and growth-stage social enterprises. Similar to seed-stage accelerators for traditional startups, impact investment accelerators provide smaller amounts of capital than Series A financings or larger impact investment deals. Most Impact Investment Accelerators are nonprofits, raising grants from donors to pay for business development services; however, commercially orientated accelerators providing investment readiness and capital-raising advisory services are emerging.

Large corporations are also emerging as powerful mechanisms for impact investing. Companies that seek to create shared value through developing new products/services, or positively impacting their operations, are beginning to employ impact investments through their value chain, particularly their supply chain.

Mission investing by Foundations

Mission investments are investments made by foundations and other mission-based organizations to further their philanthropic goals. They include any type of investment that is intended and designed to generate both a measurable social or environmental benefit and a financial return:

Impact Investing by Individuals

Impact investing historically took place through mechanisms aimed at institutional investors. However, there are ways for individuals to participate in providing early stage or growth funding to such ventures.

Exchange-Traded Funds

Exchange-traded funds like the SPDR Gender Diversity ETF (NYSE Arca: SHE) from State Street are publicly traded and hence available to anyone with a stock brokerage account. Morgan Stanley Capital International offers 11 environmental, social and governance index ETFs, including popular low-carbon and sustainability indexes.

Syndicate or Pooled Investing

Groups of angel investors focused on impact, where individuals invest as a syndicate also exist. Examples include Investors' Circle in the US, Clearly Social Angels in the UK and Toniic in Europe.

Digital Microfinance Platforms

Web-based investing platforms, which offer lower-cost investing services, also exists. As equity deals can be prohibitively expensive for small-scale transactions, microfinance loans, rather than equity investment, are prevalent in these platforms. MyC4, founded in 2006, allows retail investors to loan to small businesses in African countries via local intermediaries. Microplace was an early United States provider of such services which ceased taking on new loans in 2014, stating that its results "haven't scaled to the widespread social impact we aspire to achieve".