What is Impact Investing? Some people might just be wondering if the “Impact Investing” is just a fanciful term used by a very scholarly bunch of people. A quick trends search by Google throws up this:
Source: Google Trends
It gives an indication that “Impact investment” came into mainstream usage around 2007. It was cited as an Emerging Asset Class quite early around 2010, by JP Morgan/Rockefeller.
What is this Impact Investment?
To quote the GIIN org, the leading non-profit organisation in this space “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”
In a simpler perspective - It is an investment which strives to create some social or environmental impact apart from the expected monetary benefits. Hence, the investment is committed to such activity or setup which is mission-driven or has a recognised goal of bringing desirable larger benefits to a community (often at a disadvantage) and/or their environment.
Impact investment sits between pure-play business investment and traditional philanthropy. That means it has the dual objective of creating financial returns and social/environmental returns.
Social/ Environmental returns is a catch-all term for the returns of positive changes to the users or community other than the investors. Such positive changes relate to the people at the base of the socio-economic pyramid, their communities, access to opportunities or amenities, health, environment among others. The core focus is on any such positive linkages and externalities which should benefit people and their environment.
A great example would be a setup for providing microfinance assistance to the cottage-worker community or clean water access in the hinterlands.
Traditionally, any investment has only one goal and that is of wealth creation. It was indicated by measuring financial returns such as IRR (Internal Rate of Return), which is defined by Investopedia as “the metric to estimate the profitability of potential investments”.
Now with impact investments, you have an additionality of social and/or environmental returns, which we have written about here.
But herein lies a problem. Although the business world has several universally accepted metrics, such as the Internal Rate of Return, for estimating a potential investment’s financial returns; there is no metric that exists for evaluating social/environmental returns.
Some organisations have come forth to better understand and assess impact measurement and management such as Root Capital, the Omidyar Network, the World Economic Forum, the Rockefeller Foundation and more.
Their work has produced a number of interesting metrics, including Social Return On Investment (SROI). Similarly, the Rise Fund ( which i that such expected outcomes need to be mission-driven.h Impact Multiple of Money or IMM, in which they make a qualitative assessment of potential investments to filter out deals that are unlikely to pass the IMM hurdle. Internally, they have set IMM such that any potential investment should suggest a minimum social return of $2.50 for every $1 invested.
Such pursuits are intentionally designed to assess any social or environmental outcomes. Here an important part is intentionality which implies that such expected outcomes need to be as per design or mission-driven.
This has become increasingly relevant for a post-Covid world pivoting towards long-term solutions through sustainability - a framework where all communities and the environment are supported and sustainable grassroots infrastructure is built up. Similar goals have been put forth by the United Nations through SDGs or Sustainable Development Goals. It strives to achieve a better and more sustainable future for all. Accordingly, certain sectors are given preference for this purpose.
Some sectors and preferences of impact investors as per one study is as follows:
The core players in any impact building pursuit are
● Impact Investor (thriving on capital infusion including donations, grants, returns)
● Impact Creator (eg: Social Enterprises)
● Impact Users (sometimes referred to as beneficiaries)
The relational flow among them could be depicted as :
Source : lsecities.net
The way to assess outcomes is to evaluate net changes in total social and environmental standing due to the “new activities” compared to the “business-as-usual” case
This provides a framework to do an impact assessment on the returns. It has a focus on outcomes or long-term returns and not just the immediate outputs.
An example using this framework would be:
This clearly creates an impact on a larger scale which brings about many positive linkages and externalities. Ultimately, this helps to create a virtuous cycle set in motion by the first step of donation or funding.
Notes & References: