5.3 Impact investing: principles, strategies, and measurement

Impact investing bridges the gap between traditional investing and philanthropy, aiming to generate both financial returns and positive social or environmental impact. It challenges the notion that social issues should only be addressed through donations, instead leveraging private capital to tackle global challenges.

Investors use various strategies, from screening out harmful industries to actively seeking out companies solving social problems. Measuring impact is crucial, with standardized frameworks like IRIS+ and the SDGs helping investors track and report their social and environmental performance alongside financial returns.

Impact Investing Defined

Core Principles

Top images from around the web for Core Principles

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

1 of 3

Top images from around the web for Core Principles

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

• 

  What Is Impact Investing and Why Should You Care? | Bridgespan View original

  Is this image relevant?

1 of 3

• Impact investing intentionally seeks to create both financial return and positive social or environmental impact that is actively measured
• Intentionality is a core principle where investors seek to generate social or environmental benefits through a stated intention and deliberate strategy
• Impact investors are committed to measuring and reporting the social and environmental performance and impact of underlying investments
• Impact investments target a range of returns from below market to market rate, depending on the circumstances and goals of the investor
• Impact investing challenges the historical view that social and environmental issues should only be addressed by philanthropic donations

Characteristics and Goals

• Impact investing aims to direct capital towards companies, organizations, and funds that generate positive social and environmental impact alongside a financial return
• It spans a wide range of sectors including sustainable agriculture, renewable energy, conservation, microfinance, affordable and accessible basic services (housing, healthcare, education), and affordable and accessible financial services
• Goals of impact investing include mitigating climate change, tackling global poverty and inequality, and fostering sustainable economic development in underserved communities
• Impact investors include institutional investors (pension funds, insurance companies), family offices, foundations, development finance institutions, and high-net-worth individuals
• Impact investing has gained traction in recent years as a way to mobilize private capital to address global challenges and achieve the UN Sustainable Development Goals (SDGs)

Impact Investing Strategies

Screening and Integration

• Negative screening involves the exclusion of certain sectors, companies or practices from a fund or plan based on specific ESG criteria (tobacco, weapons, fossil fuels)
• ESG integration is the systematic and explicit inclusion of environmental, social and governance factors into traditional financial analysis and investment decisions
• Positive screening involves investment in sectors, companies or projects selected for positive ESG performance relative to industry peers
• Norms-based screening assesses investments against minimum standards of business practice based on international norms such as those defined by the UN Global Compact, ILO, UNICEF, and OECD

Thematic and Impact-First Investing

• Thematic investing focuses on one or more issue areas where social or environmental needs offer commercial growth opportunities (clean energy, water, affordable housing)
• Sustainability-themed investing is the selection of assets specifically related to sustainability in single- or multi-themed funds (sustainable agriculture, green real estate, sustainable forestry)
• Impact-first investments, or catalytic capital, are willing to take on more risk or accept lower returns in order to maximize impact and attract additional capital to an undercapitalized social or environmental challenge
• Venture philanthropy is a type of impact-first investing that adapts the concepts and techniques of traditional venture capital to achieve philanthropic objectives
• Program-related investments (PRIs) are impact investments made by foundations to support charitable activities that involve the potential return of capital within an established timeframe

Measuring Impact

Standardized Metrics and Frameworks

• Measuring and reporting impact demonstrates accountability and transparency to all stakeholders and is essential for strengthening the credibility of the impact investing industry
• The Global Impact Investing Network (GIIN) has developed IRIS+, a standardized system for measuring, managing, and optimizing impact
• The Impact Management Project (IMP) provides a forum for building global consensus on how to measure, compare and report ESG risks and positive impacts
• The Sustainable Development Goals (SDGs) and targets are increasingly being used as a framework to identify impact investing themes and measure the impact of investments
• Other common frameworks and tools include GIIRS Ratings, B Analytics, and the Social Return on Investment (SROI) methodology

Impact Measurement Process

• Key steps in impact measurement include establishing and stating social and environmental objectives, setting performance metrics, monitoring and managing performance against targets, and reporting on social and environmental performance to relevant stakeholders
• Establishing a clear theory of change is important for articulating how the investment activities will lead to the intended social or environmental outcomes
• Both qualitative and quantitative factors are essential for understanding the impact of investments. Quantitative metrics (number of jobs created, tons of CO2 emissions avoided) provide discipline and concreteness, while qualitative context (beneficiary testimonials, case studies) is critical for understanding what the numbers mean on the ground
• Engaging stakeholders, especially beneficiaries, in the measurement process can yield valuable insights and promote accountability
• Third-party assurance of impact reports enhances the credibility of impact measurement and reporting

Impact Investing for Social Change

Supporting Social Entrepreneurship

• Impact investing provides much-needed capital to social enterprises and businesses serving poor and underserved communities that may not have access to traditional financing
• By directing capital to social entrepreneurs, impact investing helps scale innovative business models that address social and environmental challenges in a sustainable way
• Microfinance is a prime example of how impact investing can support entrepreneurship and economic empowerment in impoverished communities through the provision of small loans and other financial services (savings, insurance, money transfers)
• Impact investments can support social enterprises across various sectors including agriculture, education, healthcare, renewable energy, and affordable housing
• Acumen is a notable example of an impact investing fund that provides patient capital to early-stage companies tackling poverty in developing countries

Poverty Alleviation and Community Development

• Impact investments in areas such as affordable housing, healthcare, education, and clean energy help improve living standards and economic prospects for the poor
• Community development financial institutions (CDFIs) are specialized impact investors that provide financial services to underserved markets and populations in the U.S. (low-income, minority neighborhoods)
• Impact investors can fund projects and organizations that create quality jobs with good wages and benefits for low-income communities
• By investing in social infrastructure (schools, health clinics, community centers) and essential services, impact investors can help build more resilient and equitable communities
• By measuring impact, investors can assess the effectiveness of their investments in supporting social entrepreneurship and poverty alleviation, and make adjustments to maximize impact