A form of sustainable finance, being investments made into companies, organisations and funds with the intention of generating an intentional and identifiable social and environmental impact alongside a financial return.
Typically, these are relatively modest investments in small companies or projects with clear social goals, providing them with capital they may not otherwise have accessed. One of the most popular forms of impact investing is by targeting companies that can contribute to the UN’s Sustainable Development Goals (SDGs).
Impact investing has three key components: Intentionality: an investor sets out to exert a positive impact. Return: it should generate a positive return on the investment. Measurability: the benefits should be measurable and transparent. Some investors believe that impact investing should also incorporate the concept of ‘additionality’, which involves only allocating to businesses that they would not otherwise have chosen to invest in if they were not seeking to achieve a positive social impact.
Once considered a niche form of investing, the increasing awareness of the SDGs has made it increasingly mainstream. It has also branched out to focus on specific SDGs or other themes, such as gender diversity and creating a circular economy. Impact investing and social impact investing is where investments are made in order to create specific positive social and/or environmental outcomes (and long-term impact), whilst also achieving a financial return.
The term ‘social impact investing’ (SII) is also used. (More information: Global Impact Investing Network) Place-based impact investing is where investments are made with the intention of creating both financial returns and social / environmental outcomes to address social issues within a specific geographic location, often with a focus on the needs of marginalised communities and tailored to the strengths and resources particular to that area.
Through engaging with local stakeholders, such as entrepreneurs, community organisations and local government, investors aim to achieve long-term financial and social sustainability in the community, building local capacity and ownership, and to prompt larger systemic change by influencing other forms of capital and empowering local businesses. For example, The Good Economy, the Impact Investing Institute and Pensions for Purpose are co-leading The Place-Based Impact Investing Project, which aims to build market knowledge and influence institutional investors to consider investing in asset classes that deliver long-term financial returns alongside place-based environmental, economic and social impacts.
See: sustainable finance, ethical investing, socially responsible investing and negative screening. Impact investments.