Traditionally, the primary focus for investments has been the financial return. However, recently the focus has shifted to a different type of reward, ones rooted in creating a social or environmental benefit. Impact investing puts investor capital to work directly in organisations, companies or projects whose core mission is to generate financial return alongside a measurable social impact, and it is joining the mainstream.
According to the Global Impact Investing Network[i], the market for impact capital, currently sized at $60 billion, could grow to $2 trillion over the next decade. It is a way of addressing some of society’s most pressing issues without sacrificing on return. And with high-net-worth (HNW) investors being increasingly motivated by emotional and philanthropic factors, it is no wonder that impact investing is seeing such a surge in interest.
Impact investments are made across the globe in a diverse range of sectors and using various financial instruments. Whether the investment is in developing economies, sustainable farming, reforming healthcare and education, micro financing, climate change or one of the many other socially responsible causes, the key is that the investors are able to see a measurable impact in return for the money they’ve put in. Impact investment has attracted a wide variety of investors from fund managers and individual investors to NGOs and religious institutions. The level of involvement in these investments can vary but in general we are seeing a trend towards more investors wanting to be active and hands on with their wealth; impact investing provides a great avenue in which to do this.
As philanthropy and the importance of corporate social responsibly (CSR) is ever apparent in business, impact investing addresses a challenge associated with traditional philanthropy – the reliance on temporary or limited grants and donations. These one-off donations, unlike impact investing, have no continuous capital impact. Impact investing is a much more sustainable and long-term form of philanthropy that provides ongoing capital. It gives entrepreneurial investors the opportunity to use their passion or expertise as well as their money to really get stuck into a project where they can see the tangible impact of their efforts, both socially and financially. It harnesses the efficiency and discipline of private capital markets to address the root causes of social and environmental problems and this prospect excites many of today’s high-net-worth investors.
Social impact funds and direct investing are both options within impact investing. Social impact funds bring the benefit of an experienced manager to guide you through the process. They have direct responsibility for managing and monitoring the opportunity. Funds also allow for cases to be singular or multiple. On the other hand, direct investments allow the individual to have greater control and say to impact the sector they want, in the way they want. It is a more hands-on way of impact investing that allows investors to have a more tangible impact. Preferences will depend on the particular investor and the level of involvement they desire.