What You Need to Know about Impact Investing (2024)

impact investments

im·pact in·vest·ments

NOUN:Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

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The practice of impact investing is further defined by the following elements.

Note: On April 3, 2019, the GIIN published the Core Characteristics of Impact Investing, which complement this definition and aim to provide even further clarity about how to approach impact investing. View these four tenets that establish baseline expectations for impact investing, here >

INTENTIONALITYAn investor’s intention to have a positive social or environmental impact through investments is essential to impact investing.

INVESTMENT WITH RETURN EXPECTATIONSImpact investments are expected to generate a financial return on capital or, at minimum, a return of capital.

RANGE OF RETURN EXPECTATIONS AND ASSET CLASSESImpact investments target financial returns that rangefrom below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.

IMPACT MEASUREMENTA hallmark of impact investingis the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.

Investors’ approaches to impact measurementwill vary based on their objectives and capacities, and the choice of what to measure usually reflects investor goals and, consequently, investor intention. In general, components of impact measurement best practices for impact investing include:

- Establishing and stating social and environmental objectives to relevant stakeholders
- Setting performance metrics/targets related to these objectives using standardized metrics wherever possible
- Monitoring and managing the performance of investees against these targets
- Reporting on social and environmental performance to relevant stakeholders

Learn more about the Core Characteristics of Impact Investing launched on April 3, the four tenets that establish baseline expectations for impact investing, here >

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Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.

The impact investing market offers diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns.

Many types of investors are entering the growing impact investing market. Here are a few common investor motivations:

• Banks, pension funds, financial advisors, and wealth managers can PROVIDE CLIENT INVESTMENT OPPORTUNITIES to both individuals and institutions with an interest in general or specific social and/or environmental causes.
• Institutional and family foundations can LEVERAGE SIGNIFICANTLY GREATER ASSETS to advance their core social and/or environmental goals, while maintaining or growing their overall endowment.
• Government investors and development finance institutions can PROVIDE PROOF OF FINANCIAL VIABILITY for private-sector investors while targeting specific social and environmental goals.

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Impact investment has attracted a wide variety of investors, both individual and institutional.

• Fund Managers
• Development finance institutions
• Diversified financial institutions/banks
• Private foundations
• Pension funds and insurance companies
• Family Offices
• Individual investors
• NGOs
• Religious institutions
• Corporates

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Impact investors have diverse financial return expectations. Some intentionally invest for below-market-rate returns, in line with their strategic objectives. Others pursue market-competitive and market-beating returns, sometimes required by fiduciary responsibility. Most investors surveyed in the GIIN's2020 Annual Impact Investor Survey pursue competitive, market-rate returns.

Respondents also report that portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.

Although very few investors report significant risk events in their impact investing portfolios, business model execution and management is by far the most often cited contributor to risk.

A comprehensive review of available research to date on the financial returns of impact investments are available in the GIIN’s report,GIIN Perspectives: Evidence on the Financial Performance of Impact Investments.The report evaluates over a dozen studies—produced by a wide range of organizations—on the financial performance of investments in three common asset classes in impact investing: private equity, private debt, and real assets, as well as individual investor portfolios allocated across asset classes.

More data on financial returns of impact investments are available in the 2015 Introducing the Impact Investing Benchmarkstudy, which looks at financial performance of private equity and venture capital impact investments, as well as the second report in the financial performance series, published in May 2017,The Financial Performance of Real Assets Impact Investments. Both of the reports were produced in partnership with the global investment advisory firm Cambridge Associates.

Click here for moreinformation fromGIIN Perspectives: Evidence on the Financial Performance of Impact Investments >

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The impact investing industry is full of success stories: stories about impact investors thinking differently about the power of their capital, stories about entrepreneurs with exciting new ideas, and stories about the end consumers who benefit from fresh solutions. All three of these perspectives are woven together in these impact investing success stories:

• • Acumen and Everytable: Bringing Good Health into Reach >
  • LeapFrog and Bima: Reaching the Unreachable >
  • Patamar Capital and Kinara Capital: Transforming Lives, Livelihoods, and Local Economies >

Plus, read these stories to explore how impact investing is improving the lives of women in Bolivia, the people and environment of Mongolia, and bilingual communities the United States. Click through the investment profiles below to view impact investing examples from the investor perspective as well.

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The GIIN estimates the size of the worldwide impact investing market to beUSD 1.164 trillion,marking the first time that the organization’s widely-cited estimate has topped the USD 1 trillion mark. The figure, which is the central finding of the GIIN’s 2022: Sizing the Impact Investing Market report, reflects an increasingly comprehensive measurement of impact assets under management globally.

The report, which was produced with the financial support ofNuveen,also spotlights two areas of development in the market that are becoming increasingly prevalent: green bonds and corporate impact investing.

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While some investors have been making impact investments for decades, recently there has emerged a new collaborative international effort to accelerate the development of a high- functioning market that supports impact investing. While this market is still relatively new, investors are optimistic overall about its development and expect increased scale and efficiency in the future.

Impact investors generally recognize broad progress across key indicators of market growth...

... but also acknowledge that some challenges remain.

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The GIIN builds critical market infrastructure and supports activities, education, and research that help accelerate the development of the impact investing field. Be sure to check out the following resources:

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