Impact investing refers to investments made based on the practice of assessing not only the financial return on investment, but also the social and environmental impacts of the investment that happen in the course of the operations of the business and the consumption of the product or service which the business creates. An impact investor seeks to enhance social structure or environmental health as well as achieve financial returns.
The investor may take an active role mentoring or leading the growth of the company,[1] similar to the way a venture capital firm assists in the growth of an early-stage company. Impact investors follow an investment strategy in which positive social screening criteria are an integrated component of the investment process, whereas the term socially responsible investing may include negative screening criteria in the investment decision.[2][3]
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Historically, regulation - and to a lesser extent, philanthropy - was an attempt to minimize the negative social consequencies of business activies. But there is a history of individual investors using socially responsible investing to express their values, usually by avoid investing in specific companies or activities with negative effects. In the 1990s, Jed Emerson advocated the blended value approach, 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 to measure non-financial effects inside and outside of corporations. In 2000, Baruch Lev of NYU Stern School of Management pulled together thinking about intangible assets in a book by the same name, which furthered thinking about 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.
The number of funds engaged in impact investing has grown quickly in the last five years, and a 2009 report from the Monitor Group, a research firm, estimated the impact investing industry could grow from its present $50 billion or so in assets to $500 billion in assets within the next decade.[4] This 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.[4] Its growth is partly in response to criticism of traditional forms of philanthropy and international development, which have been characterized as unsustainable and driven by the goals - or whims - of the 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 investments are structured similarly to those in the rest of the venture capital community. In addition, other types of investment mechanisms are emerging through crowd-sourced investment and debt financing.
Finally, impact investment is typically made in a for-profit enterprise, but new enterprise structures are emerging.
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