Impact investing offers competitive financial returns while making a positive social and environmental impact. Investors can diversify their portfolio, align it with their values, and support social entrepreneurs’ expansion.
Business leaders today are seeking ways to integrate social and environmental considerations into their planning and decision-making processes, and The Sigma School’s social entrepreneurship and impact investing concentration equips future business leaders to meet these challenges head on.
Investing in Social Entrepreneurs
Investing in social entrepreneurs can take many forms, from providing startup capital to purchasing shares of established firms. Most impact investors are institutional, yet there are increasing opportunities for individuals to participate through a range of financial services companies and online investment platforms.
Measuring impact can be challenging, but several frameworks have been put in place to aid this endeavor. The Global Impact Investing Network’s impact reporting and investment standards offer guidance for developing double-bottom line metrics which consider both financial and non-financial results.
Roth maintains that impact investing is superior to pure philanthropy because investors can extract and redeploy capital more efficiently; by contrast, grant givers could encourage an enterprise’s profitability even when doing so detracts from its mission (as with Husk Power). His model fails to take into account how political or regulatory changes might negatively impact an investee and cause financial loss for investors.
Impact Investing Definition
Investment in companies, projects or funds with an aim of creating social or environmental benefit while earning financial return is known as social impact investing. Investors range from individual retail investors all the way up to large institutional players like fund managers, family offices and foundations.
Impact investing refers to an umbrella of investment practices that encompass divestment, screening and more in-depth strategies such as microfinance loans. Impact investing also includes charitable giving as one form of impact investment practice but it should generally be considered its own type.
Measuring and reporting impact are core components of impact investing. Metrics may differ depending on who the investor is; retail individuals might expect tangible metrics like houses built or jobs created while institutions might focus more on complex quantitative outcomes such as childhood literacy rates. Sometimes these different expectations clash.
Impact Investing Trends
Since 2008 and the inaugural impact investing conference, the sector has experienced remarkable expansion. Both investors and entrepreneurs alike are becoming more attuned to aligning their investments with their values; and an impressive 61% of millennial investors invest in impact investments according to Fidelity Charitable’s donor-advised fund program survey in 2022.
Sorting through all the investment opportunities claiming to be impact investing can be daunting, particularly as its definition continues to evolve. Furthermore, many impact investments are focused on emerging markets or sectors which may be more volatile than conventional investments.
Understanding how to measure and communicate impact is another significant challenge, given that there are various approaches for doing so; different measurements might produce results which conflict. Comparing results across approaches is essential for building an authentic impact investing market.
Impact Investing Opportunities
Individuals investing their capital can utilize it in many different ways. For instance, they could invest in companies with explicit social missions, like solar power or carbon sequestration; invest in impact-focused mutual funds or ETFs; lend to nonprofit organizations supporting women entrepreneurs or affordable housing initiatives; or lend directly to nonprofits through loan funds that offer micro loans for women entrepreneurs or affordable housing initiatives.
Investors interested in impact investments include fund managers, development finance institutions, private foundations, pension funds, banks, insurance companies, religious organizations and individuals. Impact investments may offer below-market (concessionary) or risk-adjusted market rate returns and can be made across asset classes like cash equivalents, debt securities, real assets venture capital and private equity investments.
As the industry evolves, new players and products emerge; it is wise to seek professional advice from legal, financial, and philanthropic angles before undertaking any impact investments.