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Impact investing refers to investments that are targeted at generating positive social change while making some financial gain. A decade ago, impact investing was almost unknown. A decade later, it is now a market that is estimated to be around $250 billion. Impact investment can take the form of direct equity investments, social impact bonds, via impact funds, or new forms of debt investments. It is essentially a strategy that prioritizes investments in enterprises that benefit the environment. For example, impact investors invest in enterprises that positively affect the economy. For example, companies that develop affordable housing, provide health screening or are into renewable energy.
There are two types of investors. The impact-first put impact before financial returns and is okay with lower financial returns as long it is significant. The other type is the finance-first impact investors who put a return on investment above impact.
Impact Investment and Funding
The major players in impact investing are institutional investors. For example, investment management companies, hedge funds, private foundations, banks, pension funds, and other fund managers. However, with changes in the investment ecosystem, more individual investors are getting involved.
Owing to its nature connects financial markets with the real economy. Hence it is relevant for investors and fundraisers who are in need of capital. If you are a fundraiser or an investor, or you probably work with any organization that seeks capital, then impact investing is your go-to solution. How’s that possible?
Impact investors have a network with significant pooled assets. Impact investors actively seek where to invest these assets. Some of the industries that attract impact investors are renewable energy, and basic services including housing, healthcare, education, micro-finance, and sustainable agriculture. Businesses and nonprofits in those industries enjoy lots of financial benefits. In most cases, impact investors and lenders provide better terms and, in some instances, technical assistance funds. You also get perks such as lower reputation risks and exposure to more talents, ideas, and skill sets.
Trends in Impact Investment Entering the Mainstream
There is now a growing interest in impact investment as more investors are trying to get involved in that investment space. For example, one of the world’s largest asset managers, BlackRock, with $6.96 trillion under management, has committed to eliminating “high-risk” investments. This brings impact investment to the mainstream and raises the stakes for other financial institutions.
According to the Global Impact Investment Network (GIIN), as of April 2019, the impact investing market was estimated to be about $502 billion. It is still early days in 2020, but there are already signs that there will be a significant increase.
As a result of the increased interest in impact investing, there is an increase in the development of new products and services. The idea is to stay competitive. The result is that the market will continually grow and mature in response to scaling.
The aim of impact investment is to generate social impact by investing in sustainable ventures. Both social impact and financial sustainability are core elements and must be balanced. Maintaining the right balance is key to the principles of impact investment. This means that measurement and reporting will be critical to maintaining the effectiveness and perception of impact investments in the future.
Gender Lens Investments
All over the world, there is a belief that investing in women is one of the best ways to influence society both socially and economically. This has led to a shift in the way women and girls are perceived, from program beneficiaries to financial movers and shakers. Owing to this change, it is estimated that some $12 trillion could be invested in advancing women’s equality by 2025. The ripple effect is that women who work will be able to invest up to 90% of their earnings into the investments of their families. As such, there will be an increasing overlap in impact investments in gender and health, gender and education, and gender and agriculture as well.
Impact investment is growing exponentially. More people, businesses, and governments are now aware of the social and economic benefits of impact investing. This also means that more investors will gain influence. Going by the current trends in the market, impact investment is going to be the future of the investment space.
ESG Enterprise provides tools and data for companies to access private and public ESG ratings through various lenses.