What is Impact Investing?
Wikipedia defines impact investing as:
an investment strategy whereby an investor proactively seeks to place capital in businesses that can generate financial returns as well s an intentional social and/or environmental goal.
The Global Impact Investing Network (GIIN) defines impact investing as:
Impact investments aim to solve social or environmental challenges while generating financial returns, which can range from producing a return of principal capital to offering market-rate or even market-beating financial returns.
Investors are increasingly seeking impact investing opportunities or investments that generate a financial return while solving social and environmental problems. The Monitor Institute’s recent report on “Investing for Social & Environmental Impact” estimates that Impact Investing has the potential to grow to about 1% of total managed assets, which would result in about $500 B of capital channeled toward social and environmental impact.
The Economist, in their recent article “Happy Returns: birth of a virtuous new asset class” impact investing is explained as:
designed to yield both a financial return and a broader benefit to society.
The Rockefeller Foundation explains the concept:
Impact investing— which helps address social and/or environmental problems while also turning a profit—could unlock substantial for-profit investment capital to complement philanthropy in addressing pressing social challenges.
The Wary Eye
Can social innovation have its cake and eat it too? Is it possible to create market solutions that create social and environmental good but that also can put capital in the pockets of entrepreneurs, investors, companies, and even governments? Not everyone is so sure.
There has been some criticism of the concept and viability of impact investing.
For example, Next Billion posted this article “The Dangerous Promise of Impact Investing–From Ashoka Europe” quoted Ashoka’s Europe director’s qualms with impact investing:
“Great social entrepreneurs look for the fastest way to change the system with the cheapest form of funding available – not for the safest way to produce surpluses to pay back expensive loans or mezzanine capital.” This exposes the weakness of the impact investing movement, which is predicated on the ability, and willingness, of social ventures to generate income.
And, in the same article in which the Economist outlines the concept, it also outlines some skepticism:
New regulations are needed (to clarify, for instance, whether pension funds can invest with an explicitly social purpose). More people need to be tempted out of mainstream finance. Better metrics for social impact are essential. None of this is easy, especially in turbulent times.