Impact investing is a hot topic these days. But what is it, and is it right for you? Below is a quick primer to help you answer these questions.
Impact investing is the investment of financial capital into a company, organization, or fund with the intention of generating a financial return alongside a social, environmental, governance, or faith-based impact. This type of activity has been going on for decades, but the term was formally coined in 2007 to describe a growing industry focused on using financial investments to address social and environmental problems.
Traditionally, financial assets have been viewed as falling into one of two categories: (1) investment capital, which is deployed to maximize financial return through traditional investing; or (2) philanthropic capital, which is donated to charitable causes via grants. Impact investing posits that this dualistic view is overly simplistic, and that there are opportunities in the marketplace to invest capital that makes money and does good—both/and instead of either/or.
One of the most useful ways to visualize impact investing is on a spectrum, as depicted below. With grants (philanthropy) on one end and traditional investing on the other, impact investing can be viewed as occupying the space in the middle.
And just like the marketplace for traditional investing or grantmaking, the impact investing space is extremely wide and varied, with offerings ranging across sectors (e.g. education, health), geographies (domestic, international), risk profiles (fixed-income to venture capital), and return expectations (below market rate to market rate and above). This wide range of offerings provides an opportunity for investors and philanthropists to invest for both purpose and profit. Let’s look at a few examples:
1. INVEST SOME OF YOUR TRADITIONAL INVESTMENT CAPITAL FOR MARKET-RATE RETURNS WHILE ADDRESSING AN ISSUE OR A GEOGRAPHY THAT MATTERS TO YOU. Let’s say you are passionate about education in the U.S. A quick search of ImpactAssets list of the 50 top impact investment fund managers using these two filters reveals 11 funds that fit your profile. And a scan of ImpactSpace’s company database reveals 291 unique companies that align. As with any investment, these opportunities require research and vetting to determine their suitability and alignment with your objectives. But the number of offerings in the marketplace is large and growing—in terms projects and funds, as well as resources and databases to help you identify them.
2. ALLOCATE SOME OF YOUR INVESTMENT CAPITAL TOWARD LOW-RISK, LOW-RETURN, HIGH-IMPACT PRODUCTS. Your investment portfolio likely contains some longer-term, fixed-income products like treasuries. You could put some of that money toward the purchase of Calvert Impact Capital’s Community Investment Notes, which in turn provide low-interest loans for community development around the world. These notes pay back 1–4% interest over one to fifteen years, and have historically been as stable as government securities.
3. DEPLOY SOME OF YOUR GRANT CAPITAL TO IMPACT INVESTMENTS THROUGH A DONOR-ADVISED FUND (DAF), WITH RETURNS CYCLING BACK INTO THE DAF FOR RE-INVESTMENT. Another way to approach impact investing, and one that is often useful for new entrants to test the waters, is to establish a donor-advised fund, receive the tax benefit, and then deploy the charitable funds to for-profit impact investments. Returns then cycle back into your DAF, allowing you to re-invest that capital in other impact investments or donate proceeds to charity. A little-known but increasingly popular option, this unique DAF structure is available via ImpactAssets and the Impact Foundation.
These are just a few examples of the many ways to engage in impact investing. But they illustrate the breadth of opportunities available in the marketplace, and the importance of moving beyond a binary view of financial assets to one that seeks to effect a positive impact on society while also making a profit.
Ultimately, all forms of financial capital contribute to solving the complex social problems of our time—relief aid, development assistance, charitable and philanthropic giving, and investment. Investors and philanthropists should consider impact investing as a powerful tool for generating sustainable change in their areas of interest while simultaneously growing their money.
If you'd like to learn more about impact investing or explore ways to incorporate it into your financial portfolio, call or email us at Nexus Impact Advisors. We'd love to chat.
Founder & Managing Principal
 The Global Impact Investing Network (GIIN), https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing
Disclaimer: This article and all fund managers, impact investment opportunities, and other links included herein are for informational and illustrative purposes only. This article is not, and should not be regarded as, “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation.