25 Jul Impact Investing: Straight From Wikipedia
Impact investing refers to investments “made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside (or in lieu of) a financial return.”
Institutional investors, notably North American and European development finance institutions, pension funds and endowments have played a leading role in the development of impact investing holistically, across all asset classes, with an initial focus on private equity, venture capital and green infrastructure.
“Impact investments can be made in emerging and developed markets, and target a range of returns from below-market to above-market rates, depending upon the circumstances.” Impact investing tends to have roots in either social issues or environmental issues, and has been contrasted with microfinance. Impact investors actively seek to place capital in businesses, nonprofits, and funds that can harness the positive power of enterprise. Impact investing occurs across asset classes; for example, private equity/venture capital, debt, and fixed income.
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 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‘.