Impact Investing

Impact investing is the practice of directing capital into companies, funds, or projects with the explicit intention of generating measurable positive social or environmental outcomes alongside a financial return. You are not donating. You expect to get your money back and earn a return while the investment also improves something in the world. The Global Impact Investing Network estimated the global impact investing market at $1.571 trillion in assets under management in 2022, a figure that has continued growing as institutional investors added dedicated impact mandates.

Think of impact investing like a business that donates a portion of revenue to charity, except here the entire business model produces the good outcome.

What Distinguishes Impact Investing from ESG

ESG investing screens or weights portfolios based on environmental, social, and governance criteria, often applied to publicly traded companies. Impact investing requires additionality: your capital must be making something happen that would not have occurred otherwise. Buying shares of a renewable energy company on the open market is ESG. Providing a growth loan to a solar installation startup in Kenya that could not access commercial credit is impact investing.

The measurability standard is also higher. Impact investors expect their investees to track and report specific outcome metrics, such as metric tons of carbon avoided, kilowatt-hours of clean energy produced, or number of underserved patients receiving healthcare. Vague sustainability claims do not satisfy this standard.

Asset Classes Used in Impact Investing

Impact investing spans every major asset class. The mix you choose depends on your return expectations, liquidity needs, and which impact themes you want to pursue.

• Private equity and venture capital: Direct investment in high-growth companies solving environmental or social problems. Generates impact through business model design.
• Private debt: Loans to underserved borrowers, including microfinance institutions, community development financial institutions, and social enterprises.
• Real assets: Green infrastructure, sustainable forestry, affordable housing, and conservation finance.
• Public equities: Shareholder engagement strategies at publicly traded companies with a mandate to use ownership influence to drive specific outcomes.
• Social impact bonds: Government-commissioned contracts where private investors fund a social program and receive returns only if defined outcomes are achieved.

Measuring Impact: The IRIS+ Framework

The Global Impact Investing Network maintains IRIS+, a catalog of standardized impact metrics used by investors and fund managers to track performance. Metrics cover areas including financial inclusion, health, education, energy access, food security, and environmental sustainability.

Standardization matters because without common metrics, comparing the impact performance of two funds addressing the same problem is impossible. A microfinance fund that reports "number of loans made" and one that reports "change in borrower income above baseline" are measuring completely different things, and only one of them is actually capturing whether lives changed.

Returns in Impact Investing

Impact investing does not require accepting below-market returns, though some strategies do involve a concessional element when capital is deployed in underserved markets where commercial returns are insufficient to attract purely profit-motivated investors. Market-rate impact investing in sectors like clean energy and sustainable food systems has demonstrated competitive returns. Several leading impact private equity funds have posted IRRs comparable to their non-impact counterparts over the past decade.

Blended finance structures combine concessional public or philanthropic capital with private investment. The public or philanthropic layer absorbs first-loss risk or provides below-market returns, which makes the overall structure attractive enough for commercial investors to participate. This technique has mobilized private capital into development finance that markets alone would not fund.

Sources:
https://thegiin.org/research/
https://iris.thegiin.org/
https://www.ifc.org/en/topic/impact-investing