Things You Didn’t Know About Impact Investing

You may not have heard about impact investing or its benefits, but the idea is growing. The concept is an asset class that aims to create positive change. But how does it differ from the traditional investment?

Impact Investing Isn’t Maximizing Profits

Impact investing is a growing movement that doesn’t focus on maximizing profits but on making a positive impact.  While there is still some debate about measuring impact investing’s success, the market has grown exponentially in recent years. According to several recent studies, the total market for this investment is expected to reach more than $715 billion by 2020. As the market grows, so do the potential social and financial benefits.

It Requires Transparency

Proper transparency is vital to impact investing. This allows investors to monitor impact and ensures optimal risk management practices. It also enhances the impact investing experience.

One way to increase transparency in your portfolio is to make sure you know who’s behind your investments. When comparing companies, look for transparency in the financial reporting and ESG policies. For example, the SEC requires companies to submit quarterly and annual financial reports.

It’s A Lens Or Approach

Impact investing is a popular way to invest that aims to make a positive impact in a particular area. It is an innovative approach that can help bring more capital to targeted social causes and issue areas and offers new approaches. Most impact-investing funds and organizations are geared toward improving human well-being. This approach is becoming more mainstream and is growing at a rapid pace.

Impact investing is different from philanthropic contributions and traditional investments. The critical difference is that impact investing emphasizes investments’ financial and social impacts. Many impacts investing opportunities focus on financial and social returns and are often called B Corporations. These companies aim to create triple-bottom-line strategies that benefit people, communities, and the environment. In addition, impact investing focuses on investing in causes that matter to an individual.

It’s Not An Asset Class

Impact investing is not an asset class but a philosophy and a way of looking at investments. It involves investing in projects that will have an impact on society. This can include public and private debt investments, real estate, and other financial instruments. The majority of impact investments are made in private debt. Although impact investing is not a specific asset class, it has been gaining popularity and has become mainstream. There are several key differences between impact investing and traditional investing. While impact investing is not an asset class per se, it does have many of the same characteristics as traditional investments. For instance, a loan to a not-for-profit housing development would be considered a fixed-income instrument and included in an organization’s fixed-income allocation.

It Involves Venture Capital

Impact investing involves venture capital (VC) in companies doing business to help solve societal problems. These investments usually involve equity investments made by foundations and funds geared toward impact investing. These investments generally focus on social and environmental returns, with financial returns often taking a backseat. However, one study shows that investments made by impact investors have a higher success rate than those made by other investors. The top-third of impact investments have achieved returns of over three times the median for other investments.

The role of impact investors is similar to that of traditional venture capitalists, but they also play roles distinct from traditional venture capitalists. These investors work to create sustainable markets by anticipating consumer demand and funding innovations that fulfill that need.

It Involves Social Impact Bonds

Social impact bonds are an investment instrument that enables investors to fund projects with a social benefit. A SIB, or social impact bond, is an outcomes-based contract in which a government or non-governmental organization will pay the risk investor if the results they expect are achieved. The concept of a social impact bond is not new.  Social Impact Bonds are a unique form of public-private partnerships. They allow investors to contribute capital to scale the work of high-quality service providers. The government repays investors based on outcomes, which are usually measurable. This way, the risk is shared between the government and the private sector. The outcomes of a project are the most crucial determinant of how much profit is generated by the bond.