Impact Investing Explained: Definition, Types, and Examples
Impact investing is an investment strategy that aims to generate specific beneficial social or environmental effects in addition to financial gains. Impact investments may take the form of numerous asset classes and may result in many specific outcomes. The point of impact investing is to use money and investment capital for positive social results.
Impact investing is an investment strategy that aims to generate specific beneficial social or environmental effects in addition to financial gains. Impact investments may take the form of numerous asset classes and may result in many specific outcomes. The point of impact investing is to use money and investment capital for positive social results.
KEY TAKEAWAYS
- Impact investing is a general investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact.
- Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.
- Socially responsible (SRI) and environmental, social, and governance (ESG) investing are two approaches to impact investing, although there is still some disagreement over terminology in the investing community.
- According to the Global Impact Investing Network, more than 88% of impact investors reported that their investments met or exceeded their expectations.
- Studies show that the median impact fund realized a 6.4% return, compared to 7.4% from non-impact funds.
- Impact investing is a general investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact.
- Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.
- Socially responsible (SRI) and environmental, social, and governance (ESG) investing are two approaches to impact investing, although there is still some disagreement over terminology in the investing community.
- According to the Global Impact Investing Network, more than 88% of impact investors reported that their investments met or exceeded their expectations.
- Studies show that the median impact fund realized a 6.4% return, compared to 7.4% from non-impact funds.
Understanding Impact Investing
The term impact investing was first coined in 2007, but the practice was developed years earlier.1 A basic goal of impact investing is to help reduce the negative effects of business activity on the social environment. That's why impact investing may sometimes be considered an extension of philanthropy.
Investors who use impact investing as a strategy consider a company's commitment to corporate social responsibility (CSR) or the sense of duty to positively serve society as a whole before they become involved with that company. The type of impact that can evolve from impact investing varies based on the industry and the specific company within that industry, but some common examples include giving back to the community by helping the less fortunate or investing in sustainable energy practices to help save our planet.
This strategy actively seeks to make a positive impact by investing, for example, in nonprofits that benefit the community or in clean-technology enterprises that benefit the environment.
The bulk of impact investing is done by institutional investors, including hedge funds, private foundations, banks, pension funds, and other fund managers.
However, a range of socially conscious financial service companies, web-based investment platforms, and investor networks now offer individuals an opportunity to participate, too. One major venue is microfinance loans, which provide small-business owners in emerging nations with startup or expansion capital. Women are often the beneficiaries of such loans.
The term impact investing was first coined in 2007, but the practice was developed years earlier.1 A basic goal of impact investing is to help reduce the negative effects of business activity on the social environment. That's why impact investing may sometimes be considered an extension of philanthropy.
Investors who use impact investing as a strategy consider a company's commitment to corporate social responsibility (CSR) or the sense of duty to positively serve society as a whole before they become involved with that company. The type of impact that can evolve from impact investing varies based on the industry and the specific company within that industry, but some common examples include giving back to the community by helping the less fortunate or investing in sustainable energy practices to help save our planet.
This strategy actively seeks to make a positive impact by investing, for example, in nonprofits that benefit the community or in clean-technology enterprises that benefit the environment.
The bulk of impact investing is done by institutional investors, including hedge funds, private foundations, banks, pension funds, and other fund managers.
However, a range of socially conscious financial service companies, web-based investment platforms, and investor networks now offer individuals an opportunity to participate, too. One major venue is microfinance loans, which provide small-business owners in emerging nations with startup or expansion capital. Women are often the beneficiaries of such loans.
Types of Impact Investments
Impact investments come in many different forms of capital and investment vehicles. Like any other type of investment class, impact investments provide investors with a range of possibilities when it comes to returns. But the most important thing is that these investments offer both a financial return and are in line with the investor's conscience.
Impact investments come in many different forms of capital and investment vehicles. Like any other type of investment class, impact investments provide investors with a range of possibilities when it comes to returns. But the most important thing is that these investments offer both a financial return and are in line with the investor's conscience.
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According to a 2020 survey by the Global Impact Investing Network (GIIN), the majority of investors who choose impact investing look for market-rate returns.2
The opportunity for impact investments varies and investors may choose to put their money into emerging markets (EM) or developed economies. Impact investments span several industries including:
- Healthcare
- Education
- Energy, especially clean and renewable energy
- Agriculture
According to a 2020 survey by the Global Impact Investing Network (GIIN), the majority of investors who choose impact investing look for market-rate returns.2
The opportunity for impact investments varies and investors may choose to put their money into emerging markets (EM) or developed economies. Impact investments span several industries including:
- Healthcare
- Education
- Energy, especially clean and renewable energy
- Agriculture
Environmental, social, and governance (ESG)
Environmental, social, and governance (ESG) refers to the practices of an investment that may have a material impact on the performance of that investment. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. While there is an overlay of social consciousness, the main objective of ESG valuation remains financial performance.
Environmental, social, and governance (ESG) refers to the practices of an investment that may have a material impact on the performance of that investment. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. While there is an overlay of social consciousness, the main objective of ESG valuation remains financial performance.
Socially responsible investing (SRI)
Socially responsible investing (SRI) goes a step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines. The underlying motive could be religion, personal values, or political beliefs. Unlike ESG analysis which shapes valuations, SRI uses ESG factors to apply negative or positive screens on the investment universe.
Socially responsible investing (SRI) goes a step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines. The underlying motive could be religion, personal values, or political beliefs. Unlike ESG analysis which shapes valuations, SRI uses ESG factors to apply negative or positive screens on the investment universe.
Special Considerations
Socially and environmentally responsible practices tend to attract impact investors, meaning companies can benefit financially from committing to socially responsible practices. Impact investing appeals largely to younger generations, such as millennials, who want to give back to society, so this trend is likely to expand as these investors gain more influence in the market.
Investors also tend to profit. A 2020 survey by the Global Impact Investing Network found that more than 88% of impact investors reported that their investments were meeting or surpassing their financial expectations.3
By engaging in impact investing, individuals or entities essentially state that they support the message and the mission of the company in which they're investing, and they have a stake in the company's welfare. As more people realize the social and financial benefits of impact investing, more companies will engage in social responsibility.
While money isn't everything, in a 2020 survey of impact investors, more than 88% of respondents said that their investments were meeting or exceeding financial expectations.3
Socially and environmentally responsible practices tend to attract impact investors, meaning companies can benefit financially from committing to socially responsible practices. Impact investing appeals largely to younger generations, such as millennials, who want to give back to society, so this trend is likely to expand as these investors gain more influence in the market.
Investors also tend to profit. A 2020 survey by the Global Impact Investing Network found that more than 88% of impact investors reported that their investments were meeting or surpassing their financial expectations.3
By engaging in impact investing, individuals or entities essentially state that they support the message and the mission of the company in which they're investing, and they have a stake in the company's welfare. As more people realize the social and financial benefits of impact investing, more companies will engage in social responsibility.
While money isn't everything, in a 2020 survey of impact investors, more than 88% of respondents said that their investments were meeting or exceeding financial expectations.3
Impact Investing vs. Socially Responsible Investing (SRI)
SRI, which is sometimes referred to as sustainable or socially conscious investing or, when focused on environmental causes, green investing, is a form of impact investing. While the definition of SRI encompasses avoidance of harm, impact investing also suggests positive impact via its investments.
Investors who practice SRI tend to believe in and choose companies that subscribe to their views concerning human rights, environmental protection, and a sense of responsibility to consumers. For example, some investors may choose not to invest in companies that manufacture, distribute, or promote cigarettes because of their overall negative effect on people's health.
Many asset management companies, banks, and other investment houses now offer funds specifically tailored to socially responsible investors.
SRI, which is sometimes referred to as sustainable or socially conscious investing or, when focused on environmental causes, green investing, is a form of impact investing. While the definition of SRI encompasses avoidance of harm, impact investing also suggests positive impact via its investments.
Investors who practice SRI tend to believe in and choose companies that subscribe to their views concerning human rights, environmental protection, and a sense of responsibility to consumers. For example, some investors may choose not to invest in companies that manufacture, distribute, or promote cigarettes because of their overall negative effect on people's health.
Many asset management companies, banks, and other investment houses now offer funds specifically tailored to socially responsible investors.
Examples of Impact Investing
The Gates Foundation
One of the most well-known impact investment funds is the Bill & Melinda Gates Foundation, launched by the celebrated Windows pioneer with a total endowment of nearly $50 billion.4 While most of the Gates Foundation is engaged in philanthropy, it also has a strategic investment fund with $2.5 billion under management, which is invested in ventures that align with the Foundation's goals of improving health, education, and gender equality.5 As explained on the fund's website, the strategic investment fund supports "organizations or projects that benefit the world's poorest and are often overlooked by traditional investors."67
One of the most well-known impact investment funds is the Bill & Melinda Gates Foundation, launched by the celebrated Windows pioneer with a total endowment of nearly $50 billion.4 While most of the Gates Foundation is engaged in philanthropy, it also has a strategic investment fund with $2.5 billion under management, which is invested in ventures that align with the Foundation's goals of improving health, education, and gender equality.5 As explained on the fund's website, the strategic investment fund supports "organizations or projects that benefit the world's poorest and are often overlooked by traditional investors."67
Soros Economic Development Fund
The Soros Economic Development Fund is part of the Open Society Foundations, launched by billionaire philanthropist George Soros. Soros has contributed about $18 billion to the Open Society Foundations, $90 million of which is actively invested in impact ventures. As the name implies, the Foundation seeks to support "open societies" by promoting democracy, legal reforms, higher education, and journalism, as well as other fields.89
The Soros Economic Development Fund is part of the Open Society Foundations, launched by billionaire philanthropist George Soros. Soros has contributed about $18 billion to the Open Society Foundations, $90 million of which is actively invested in impact ventures. As the name implies, the Foundation seeks to support "open societies" by promoting democracy, legal reforms, higher education, and journalism, as well as other fields.89
The Ford Foundation
The Ford Foundation was launched in 1936 by Edsel and Henry Ford, with an initial endowment of $25,000. Today, it has one of the world's largest private endowments, with $16 billion under management.10 Most of that money is given as grants to support causes aligned with the values of the foundation; however, in 2017 the Ford Foundation announced plans to invest $1 billion in business ventures aligned with their mission.11
The Ford Foundation was launched in 1936 by Edsel and Henry Ford, with an initial endowment of $25,000. Today, it has one of the world's largest private endowments, with $16 billion under management.10 Most of that money is given as grants to support causes aligned with the values of the foundation; however, in 2017 the Ford Foundation announced plans to invest $1 billion in business ventures aligned with their mission.11
What is impact-focused investing?
Impact-focused investing, or simply impact investing, is an investment strategy that seeks to achieve social or environmental goals, as well as generate profit. Unlike philanthropic endeavors, impact investors typically expect a return on their investment, although this may be a secondary consideration.
Impact-focused investing, or simply impact investing, is an investment strategy that seeks to achieve social or environmental goals, as well as generate profit. Unlike philanthropic endeavors, impact investors typically expect a return on their investment, although this may be a secondary consideration.
Does impact investing work?
Most impact investors seek returns that are comparable to market rates, and some impact funds can even outperform the market. Generally speaking, the returns from impact investing tend to be slightly lower than the market average. In a study by the University of California, the median impact fund had a median internal rate of return of 6.4%, compared to 7.4% from non-impact seeking funds.12
Most impact investors seek returns that are comparable to market rates, and some impact funds can even outperform the market. Generally speaking, the returns from impact investing tend to be slightly lower than the market average. In a study by the University of California, the median impact fund had a median internal rate of return of 6.4%, compared to 7.4% from non-impact seeking funds.12
What is the difference between ESG and impact investing?
Impact investing is often associated with environmental, social, and governance(ESG) as socially responsible business practices that are gaining increasing attention in the business world. While they have many features in common, they refer to distinct practices.
Environmental, social, and governance practices refer to business decisions that could affect the returns of that company. For example, a company that knowingly employs child labor or engages in discrimination could be at a competitive disadvantage, particularly when marketing to socially conscious consumers.
Impact investing, on the other hand, is the practice of seeking investments that specifically optimize a goal other than profits. This might include investments in clean energy, education, or microfinance.
Impact investing is often associated with environmental, social, and governance(ESG) as socially responsible business practices that are gaining increasing attention in the business world. While they have many features in common, they refer to distinct practices.
Environmental, social, and governance practices refer to business decisions that could affect the returns of that company. For example, a company that knowingly employs child labor or engages in discrimination could be at a competitive disadvantage, particularly when marketing to socially conscious consumers.
Impact investing, on the other hand, is the practice of seeking investments that specifically optimize a goal other than profits. This might include investments in clean energy, education, or microfinance.
What is an impact-investing firm?
An impact-investing firm is an investment fund that specifically seeks to support beneficial social or environmental outcomes, in addition to generating financial returns. Some impact funds invest in causes that they believe will generate strong returns; others consider profits to be a secondary consideration.
An impact-investing firm is an investment fund that specifically seeks to support beneficial social or environmental outcomes, in addition to generating financial returns. Some impact funds invest in causes that they believe will generate strong returns; others consider profits to be a secondary consideration.
What is an impact-investing strategy?
An impact-investing strategy is an investment strategy that targets companies or industries that produce social or environmental benefits. For example, some impact investors seek to support renewable energy, electric cars, microfinance, sustainable agriculture, or other causes which they believe to be worthwhile.
An impact-investing strategy is an investment strategy that targets companies or industries that produce social or environmental benefits. For example, some impact investors seek to support renewable energy, electric cars, microfinance, sustainable agriculture, or other causes which they believe to be worthwhile.
The Bottom Line
Impact investing is part of a growing trend of socially responsible practices that seek to reduce some of the negative consequences of traditional business activities. By supporting companies and industries in worthwhile causes, impact investing can produce social or environmental benefits while also earning a profit.
Impact investing is part of a growing trend of socially responsible practices that seek to reduce some of the negative consequences of traditional business activities. By supporting companies and industries in worthwhile causes, impact investing can produce social or environmental benefits while also earning a profit.
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What Are MSCI ESG Ratings?
MSCI ESG ratings are a comprehensive measure of a company’s long-term commitment to socially responsible investments (SRI) and environmental, social, and governance (ESG) investment standards. In particular, the MSCI ESG ratings focus on a company’s exposure to financially relevant ESG risks.
ESG and SRI investing prioritize a company’s positive contributions to its community, the environment, and social impact. Scoring companies along ESG dimensions allows socially conscious investors to screen potential investments to fit with their investment goals and values.
KEY TAKEAWAYS
- MSCI ESG ratings measure a company’s resilience to long-term, financially relevant ESG (environment, social, governance) risks.
- ESG investing has grown to become an important and influential investment strategy, largely motivated by values of social responsibility and corporate accountability.
- MSCI’s ESG ratings score along all three dimensions of ESG and rank potential investments on a letter-scale from AAA (leaders) to CCC (laggards).
Understanding MSCI ESG Ratings
ESG investing has become increasingly popular over the past decade. The US SIF: The Forum for Sustainable and Responsible Investment reports that in 2020, more than $17 trillion of professionally managed assets were held in sustainable assets, around one-third of all assets under management.1 With its growing popularity, data providers have also created various scoring criteria upon which to rank and grade potential ESG investments, allowing socially-responsible investors to make more informed decisions when choosing which companies, ETFs, or mutual funds to include in their portfolios.
Alongside MSCI, several other financial firms have developed their own proprietary ESG scoring models, including Russell Investments and Standard & Poors (S&P) among others.23
MSCI’s ratings decompose ESG into its three thematic components: the environment; social responsibility; and corporate governance.4
Under the environmental dimension, key issues include:
- contribution to climate change
- a company’s utilization of "natural capital" (such as biodiversity and raw materials sourcing)
- pollution and waste management
- use of green technologies and renewable energy
Under social:
- health, safety, and human capital development
- product and consumer safety
- community relations
- social opportunities
And, under governance:
- corporate governance fairness and accountability
- transparency and ethics
How Do MSCI ESG Ratings Work?
Analyzing metrics within each of these key issue items, MSCI scores the companies that it rates on each key issue from zero to ten, with zero indicating virtually no exposure and ten representing very high exposure to a particular ESG risk or opportunity.5 MSCI also evaluates companies on exposure to controversial business activities (e.g., weapons, tobacco, gambling, etc.). The data informing these scores are obtained from corporate filings, financial statements, and press releases in addition to almost half of all data coming from hundreds of third-party media, academic, NGO, regulatory, and government sources.6
Scores based on individual metrics are aggregated, weighted, and scaled to the relevant industry sector to arrive at an intuitive letter-based grade, akin to lettered credit scores issued by credit rating companies.7
Source: MSCI8
According to MSCI, a "leader" (rated AAA & AA) indicates a company leading its industry in managing the most significant ESG risks and opportunities. "Average" (rated A, BBB, or BB) companies are described by a mixed or unexceptional track record of managing ESG risks and opportunities relative to industry peers; while a "laggard" (rated B or CCC) trails its industry based on its high exposure and failure to manage significant ESG risks.9
Real-World Example of MSCI ESG Ratings: Tesla, Inc.
To illustrate how MSCI ESG ratings can be used by investors, let’s take a look at the electric vehicle producer, Tesla, Inc. (TSLA). The company earns an overall grade of "A," putting it on the higher end of "average" among the 41 companies in the car industry rated by MSCI. Digging into its rating, Tesla excels in corporate governance and environmental risks, maintaining a relatively small carbon footprint while both utilizing and investing in green technologies. The company scores an average grade for product quality and safety, with the company making headlines in the past for exploding batteries, undesirable crash test ratings, and accidents involving the cars’ self-driving "autopilot" feature – although CEO Elon Musk has publicly announced a commitment to improving both driver and bystander safety.
What truly drags down Tesla’s MSCI ESG rating is its below-average score for product quality and safety.10 The battery banks in its cars have been known to spontaneously combust and the National Transportation Safety Board (NTSB) has accused Tesla for neglecting driver safety, calling certain Autopilot features "completely inadequate" and citing Autopilot as the probable cause of several deadly crashes involving Tesla cars.1112
Tesla has also been criticized for its labor management practices. For instance, the company has been found to be in violation of labor laws by blocking unionization, and that it has violated the National Labor Relations Act multiple times.13 More recently, the company’s leadership has come under fire for keeping plants open and unsafe during the COVID-19 pandemic, leading several of its workers to come down with the illness.1415
Despite earning only an "average" score, it is worth noting that only one company covered in the auto industry (including both automobiles and auto parts) currently earns "leader" status on MSCI’s ESG ratings – the French auto parts maker, Valeo SE.16
What Is ESG in Investing?
Environmental, social, and governance (ESG) criteria are used to screen investments based on corporate policies and to encourage companies to act responsibly. ESG also helps investors who care about these issues to screen for those companies that rank highly in social and environmental responsibility.
What Is MSCI's Implied Temperature Rise?
MSCI has recently developed an ESG screening criterion known as Implied Temperature Rise (ITR), which is an intuitive, forward-looking metric, expressed in degrees Celsius, designed to show the temperature alignment of companies, portfolios, and funds with global temperature goals.17 Implied Temperature Rise can help investors assess the environmental alignment of companies, portfolios, funds, and benchmarks with net-zero carbon emissions targets by the middle of this century.
How Many Companies Does MSCI's ESG Ratings Cover?
As of 2022, MSCI has ESG ratings for more than 8,500 companies worldwide.9
Updated July 25, 2022
Most investors spend their time chasing returns. But what if there was a way to do good while also turning a profit?
Several nonprofit organizations have teamed up with money managers and investment banks to create and market a new line of products that offer investors the opportunity to engage in what is now being touted as impact investing, a form of socially responsible investing.
The goal of this scheme is to invest money in companies, organizations, funds, or projects anywhere in the world that can make a positive social change while at the same time deliver a financial return to investors.
Most investors spend their time chasing returns. But what if there was a way to do good while also turning a profit?
Several nonprofit organizations have teamed up with money managers and investment banks to create and market a new line of products that offer investors the opportunity to engage in what is now being touted as impact investing, a form of socially responsible investing.
The goal of this scheme is to invest money in companies, organizations, funds, or projects anywhere in the world that can make a positive social change while at the same time deliver a financial return to investors.
KEY TAKEAWAYS
- Impact investing is an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact.
- Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.
- Socially responsible (SRI) and environmental, social, & governance (ESG) investing are two approaches to impact investing, although there is still some disagreement over terminology in the investing community.
- Impact investing is an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact.
- Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.
- Socially responsible (SRI) and environmental, social, & governance (ESG) investing are two approaches to impact investing, although there is still some disagreement over terminology in the investing community.
One Step Further
Interest in the idea has been growing steadily for years and so have the number of products being offered. For some time, a breed of investment management companies such as Impax Asset Management, Domini Impact Investments, and Parnassus Investments have been offering mutual funds that invest in socially and environmentally conscious and responsible companies.123
But today’s impact investors are going one step further, looking to invest in bonds and other investment vehicles that invest directly in socially-oriented projects.
An example of a vehicle used in impact investing is a microfinance loan, which helps people with little or no access to capital start a new business. High-net-worth individuals, in particular, are finding these offerings attractive and are willing to take on some calculated risk to invest in them.
Businesses started with microfinance loans are providing competitive returns to their investors through the bonds that back them. In some instances, impact investment vehicles have been able to garner higher returns for their investors than the broader markets did, especially during down cycles.
Interest in the idea has been growing steadily for years and so have the number of products being offered. For some time, a breed of investment management companies such as Impax Asset Management, Domini Impact Investments, and Parnassus Investments have been offering mutual funds that invest in socially and environmentally conscious and responsible companies.123
But today’s impact investors are going one step further, looking to invest in bonds and other investment vehicles that invest directly in socially-oriented projects.
An example of a vehicle used in impact investing is a microfinance loan, which helps people with little or no access to capital start a new business. High-net-worth individuals, in particular, are finding these offerings attractive and are willing to take on some calculated risk to invest in them.
Businesses started with microfinance loans are providing competitive returns to their investors through the bonds that back them. In some instances, impact investment vehicles have been able to garner higher returns for their investors than the broader markets did, especially during down cycles.
Not Just the Rich (Anymore)
What may have begun as a niche for wealthier investors is starting to get the attention of the larger retail market. Accordingly, the number of organizations offering these products is increasing. One such organization is ImpactAssets, which offers donor-advised funds to individuals and advisors looking to produce positive social and environmental change.4 Each year, the organization publishes a list of 50 investment managers who specialize in impact investing techniques, called the IA 50.5
ImpactAssets is also closely tied to Calvert Impact Capital, which offers investment and lending opportunities, such as the Calvert Community Investment Notes, a series of debt securities that started at a minimum investment of $1,000 when placed through a brokerage.6
What may have begun as a niche for wealthier investors is starting to get the attention of the larger retail market. Accordingly, the number of organizations offering these products is increasing. One such organization is ImpactAssets, which offers donor-advised funds to individuals and advisors looking to produce positive social and environmental change.4 Each year, the organization publishes a list of 50 investment managers who specialize in impact investing techniques, called the IA 50.5
ImpactAssets is also closely tied to Calvert Impact Capital, which offers investment and lending opportunities, such as the Calvert Community Investment Notes, a series of debt securities that started at a minimum investment of $1,000 when placed through a brokerage.6
Growing Interest and Variety
Big investment banks are also taking note. Goldman Sachs, for example, has jumped on the impact investing bandwagon. In 2014 it rolled out its GS Social Impact Fund, which deploys capital toward the physical, social, and economic revitalization of disadvantaged communities across the U.S.7 The fund’s investment strategy is to addresses social challenges and to mobilize new sources of private capital into the social impact arena while also providing its investors with a financial gain.
In addition, Goldman Sachs has invested in communities across the United States, supporting a wide variety of development and revitalization projects such as investments in affordable housing construction, job creation, quality education, healthcare facilities, small businesses, and more.8
The Rockefeller Foundation was one of the first foundations to experiment with social impact bonds in conjunction with the Global Impact Investing Network (GIIN), a nonprofit organization dedicated to increasing the effectiveness of impact investing.910 The foundation also funded the development of metrics to measure the performance of these social enterprises and impact investing funds.11
With the guidance of the Rockefeller Foundation, some of the biggest U.S. investment banks, including Goldman Sachs Group, Inc. (GS), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC), have created social impact bonds that have been applied to issues such as early childhood education, affordable housing, and prison rehabilitation programs.
With investor demand for impact investing products continuing to rise as the idea becomes more mainstream, several financial institutions, such as Morgan Stanley (MS), Merrill, and UBS Group (UBS), have also been developing impact-investing platforms that their wealth advisors can tap when clients request impact investment funds geared toward a certain cause.121314
Big investment banks are also taking note. Goldman Sachs, for example, has jumped on the impact investing bandwagon. In 2014 it rolled out its GS Social Impact Fund, which deploys capital toward the physical, social, and economic revitalization of disadvantaged communities across the U.S.7 The fund’s investment strategy is to addresses social challenges and to mobilize new sources of private capital into the social impact arena while also providing its investors with a financial gain.
In addition, Goldman Sachs has invested in communities across the United States, supporting a wide variety of development and revitalization projects such as investments in affordable housing construction, job creation, quality education, healthcare facilities, small businesses, and more.8
The Rockefeller Foundation was one of the first foundations to experiment with social impact bonds in conjunction with the Global Impact Investing Network (GIIN), a nonprofit organization dedicated to increasing the effectiveness of impact investing.910 The foundation also funded the development of metrics to measure the performance of these social enterprises and impact investing funds.11
With the guidance of the Rockefeller Foundation, some of the biggest U.S. investment banks, including Goldman Sachs Group, Inc. (GS), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC), have created social impact bonds that have been applied to issues such as early childhood education, affordable housing, and prison rehabilitation programs.
With investor demand for impact investing products continuing to rise as the idea becomes more mainstream, several financial institutions, such as Morgan Stanley (MS), Merrill, and UBS Group (UBS), have also been developing impact-investing platforms that their wealth advisors can tap when clients request impact investment funds geared toward a certain cause.121314
Returns Keep Them Coming Back
The move by these investment banks and money managers to offer more impact investing products seems to be a profitable one. The most recent GIIN study surveyed 294 impact investors and estimates the size of the market today is in excess of $715 billion.15 The report also found that a majority of respondents reported that their impact investments were meeting or exceeding their financial expectations. Approximately two-thirds said their investments were targeting market-rate returns.16
The move by these investment banks and money managers to offer more impact investing products seems to be a profitable one. The most recent GIIN study surveyed 294 impact investors and estimates the size of the market today is in excess of $715 billion.15 The report also found that a majority of respondents reported that their impact investments were meeting or exceeding their financial expectations. Approximately two-thirds said their investments were targeting market-rate returns.16
Millennials Are Next in Line
The next generation of investors is already exhibiting a desire to put their investment dollars behind projects, companies, and funds that are in line with their own core values. Millennials, or people born between the early 1980s and the early 2000s, are the latest group of investors who see impact investments as a way to stand up for their beliefs while also investing in their own futures.
Studies show that these investors are also now turning to financial professionals to help provide them with opportunities to generate a strong financial return while creating a positive social impact.17 They want their advisors to offer them value-based investing products as an alternative to what is being offered to them in the general markets.
And while they may be young, and low on cash at the moment, this segment of the population shouldn't be overlooked. Millennials are expected to inherit about $68 trillion in wealth, and they are already looking for ways to invest it.18
The next generation of investors is already exhibiting a desire to put their investment dollars behind projects, companies, and funds that are in line with their own core values. Millennials, or people born between the early 1980s and the early 2000s, are the latest group of investors who see impact investments as a way to stand up for their beliefs while also investing in their own futures.
Studies show that these investors are also now turning to financial professionals to help provide them with opportunities to generate a strong financial return while creating a positive social impact.17 They want their advisors to offer them value-based investing products as an alternative to what is being offered to them in the general markets.
And while they may be young, and low on cash at the moment, this segment of the population shouldn't be overlooked. Millennials are expected to inherit about $68 trillion in wealth, and they are already looking for ways to invest it.18
Still Skewed to Wealthier Investors (for Now)
More and more opportunities will continue to open up for investors seeking to align their own financial futures with their desire to make a difference in the world. For now, though, most scalable impact investing options are still geared to wealthier investors.
For those investors with less than $2.8 million to invest—the average size of impact investment deals in 2019—sustainable and responsible investment vehicles, such as mutual funds focused on socially and environmentally responsible investments, are still the way to go.19 Private deals that require a fair amount of due diligence may still be too risky for the average investor.
More and more opportunities will continue to open up for investors seeking to align their own financial futures with their desire to make a difference in the world. For now, though, most scalable impact investing options are still geared to wealthier investors.
For those investors with less than $2.8 million to invest—the average size of impact investment deals in 2019—sustainable and responsible investment vehicles, such as mutual funds focused on socially and environmentally responsible investments, are still the way to go.19 Private deals that require a fair amount of due diligence may still be too risky for the average investor.
The Bottom Line
The desire to meld investments and social responsibility is growing at a fast pace among the rich and not-so-rich. And the groundwork has been laid for the creation of numerous products to meet the demand of a new generation of socially conscious investors. As long as such investments produce competitive returns—both financial and social—their popularity will only grow.
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The desire to meld investments and social responsibility is growing at a fast pace among the rich and not-so-rich. And the groundwork has been laid for the creation of numerous products to meet the demand of a new generation of socially conscious investors. As long as such investments produce competitive returns—both financial and social—their popularity will only grow.
*See important disclosures
Impact Investing Explained: Definition, Types, and Examples
Impact investing is an investment strategy that aims to generate specific beneficial social or environmental effects in addition to financial gains. Impact investments may take the form of numerous asset classes and may result in many specific outcomes. The point of impact investing is to use money and investment capital for positive social results.
KEY TAKEAWAYS
- Impact investing is a general investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact.
- Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.
- Socially responsible (SRI) and environmental, social, and governance (ESG) investing are two approaches to impact investing, although there is still some disagreement over terminology in the investing community.
- According to the Global Impact Investing Network, more than 88% of impact investors reported that their investments met or exceeded their expectations.
- Studies show that the median impact fund realized a 6.4% return, compared to 7.4% from non-impact funds.
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