Impact investing

From Wikipedia, the free encyclopedia

Impact investing is one form of socially responsible investing and serves as a guide for various investment strategies.^[1] According to the definition of the Global Impact Investing Network (GIIN): "Impact investments are investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below-market to above-market rates, depending upon the circumstances."^[2] Impact investing tends to have roots in either social issues or environmental issues, and has been contrasted with microfinance.^[3] 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.

Impact investors are primarily distinguished by their intention to address social and environmental challenges through their deployment of capital. For example, criteria to evaluate the positive social and/or environmental outcomes of investments are an integrated component of the investment process. In contrast, practitioners of socially responsible investing also include negative (avoidance) criteria as part of their investment decisions.^[4]^[5]

Background

Historically, regulation—and to a lesser extent, philanthropy—was an attempt to minimize the negative social consequences of business activities. 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.^{[citation needed]} 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.^[6]

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 Management, collated thinking about intangible assets in a book of the same name, which furthered thinking about the non-financial effects of corporate production.^{[citation needed]}

Finally, around 2007, the term "impact investment" emerged—an approach that deliberately builds intangible assets alongside tangible, financial ones.^{[citation needed]}

The Industry

Market Size

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.^[7] 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.^[7] 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.^{[citation needed]}

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.^{[citation needed]}

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 (VC) 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. Impact investing is distinguished from microfinance (such as the MYC4 company) primarily by deal size, and secondarily by the investment for equity rather than debt.^{[citation needed]}

Organizations receiving impact investment capital may be set up legally as a for-profit, not-for profit, B Corporation, Low-profit Limited Liability Company, or other designations that may vary by country.^{[citation needed]}

Impact investment mechanisms

Institutional investors

Impact investments occur across asset classes and investment amounts. Among the best-known mechanism is private equity or venture capital. Impact investments can also be made by individual angel investors. "Social venture capital," or "patient capital," impact investments are structured similarly to those in the rest of the VC community. Investors may take an active role mentoring or leading the growth of the company,^[8] similar to the way a VC firm assists in the growth of an early-stage company. Hedge funds and private equity funds may also pursue impact investing strategies.^[9]

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.^{[citation needed]} 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 (Impact Amplifier (Cape Town, South Africa) and Open Capital Advisors (Nairobi, Kenya) are two examples in Africa).^{[citation needed]} Some private foundations also make impact investments (see Program-Related Investment).

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.^[10]

Impact investing for individuals

Impact investing primarily takes place through mechanisms open to institutional investors. However, there are ways for individuals to participate in providing early stage or growth funding to ventures that blend profit and purpose. These include RSF Social Finance, Calvert Foundation, Mosaic, and Microplace, as well as private impact-focused financial advisors such as HIP Investor.^{[citation needed]} Other opportunities available to individuals include the Institute for Community Economics' Investor Note, the Calvert Foundation's Community Reinvestment Note, or the Enterprise Community Partners' Community Impact Note. Where an account or fund is subject to ERISA—that is, it holds corporate or Taft-Hartley pension plans—legal limitations determine the extent to which investment decisions can be based on factors other than maximizing the economic returns of plan participants.^[11]

A new class of web-based investing platforms, which aims to bring impact investing into the reach of ordinary individuals with average incomes, also exists. As equity deals can be prohibitively expensive for small-scale transactions, microfinance loans, rather than equity investment, are prevalent in these platforms. Microplace was an early United States (US) pioneer in bringing impact investing within the reach of individuals of modest income, whereby residents of most US states can participate in debt funding to microfinance institutions in developing countries, with interest payouts averaging around 3%.

Zidisha is a US nonprofit that launched the first international person-to-person microfinance lending platform in 2009. Lenders may invest as little as one dollar in Zidisha loans and negotiate interest (ranging from 0% to 15%) directly with individual loan applicants in developing countries.^[12] Kiva may also be considered an impact investing platform for individual lenders. Kiva loans do not offer interest to lenders.^[13]

Impact investment networks also exist to bring together individuals with an interest in impact investing. Investor networks may have in-person meetings and/or online platforms to facilitate the identification of suitable investment opportunities. Investor networks may or may not have a pool of funds to invest on behalf of the network. Often, the role of the network is to bring together investors and those representing opportunities; however, the amount of due diligence investor networks enact in the assessment of deals varies.^{[citation needed]}

Impact investment funds

AlphaMundi
AdvisorShares Global Echo ETF NYSE: GIVE
Global Partnerships
LGT Venture Philanthropy
Acumen
Global Impact Fund
Small Enterprise Assistance Funds
LeapFrog Investments
Omidyar Network
ACCION
Lok Capital
EKO Asset Management
Elevar Equity
Ankur Capital
Bank of America Capital Access Funds Management
Beyond Capital Fund
Creation Investments
EcoEnterprises Fund
Grassroots Business Fund
Gray Ghost Ventures
Iroquois Valley Farms, LLC
Khosla Impact
Khosla Ventures
Banco FIE
SONG Investment Company
FlexCAP
PhiTrust Partenaires
Public Radio Fund, LLC
Shared Interest
RENEW LLC
Aavishkaar Venture Management Services
New Media Ventures
EcoAsia Sustainable Agriculture Fund
Aravaipa Ventures
Root Capital
Truestone Impact Investment Management
Unitus Seed Fund
Insitor Impact Fund