How does impact investing work?

Impact investments are investments made into companies, organisations, and funds with the intention of generating social and environmental impact alongside a financial return.

Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.

What impact investing is not

To explain what impact investing is, it might be easier to start with what it is not. Impact investing is not:

• Corporate social responsibility (CSR). CSR is a company’s sense of responsibility towards the community and environment in which it operates. Many companies view CSR as a charitable activity and peripheral to the company’s core business.
• Socially responsible investing (SRI). SRI, or ethical investing, is a negative screening of industries deemed unethical, such as tobacco, arms, or casinos. Impact investing is about positively doing good rather than “doing no harm.”
• Private equity with environment, social, and governance (ESG). ESG are sustainability factors that can be layered on to investment analysis to identify companies with better long-term performance.

What impact investing is

According to Global Impact Investing Network, the practice of impact investing is defined by the following four core characteristics:

Intentionality: An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing

Investment with return expectations: Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.

Range of return expectations and asset classes: Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.

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, ensuring transparency and accountability while informing the practice of impact investing and building the field.