The intention and interest to create a positive impact through their investments has been on the rise amongst investors in recent years. However, the lack of a clear definition and structure of “impact funds” has led to the money intended to be directed toward impact investing being infused in other investment avenues, such as ESG Funds and VC/PE Funds, that these socially responsible investors think might be generating active, positive impact.
This can largely be attributed to the operational structure of the impact funds, which is usually just a copy of either a VC or a PE fund. The traits and terms of an impact fund are highly similar to those of a PE/VC, be they fund life, targeted IRR, or incentives. This ambiguity makes it difficult for investors to recognize impact funds distinctly, leading to capital flows for impact being directed to sources other than impact funds.
In order to overcome this challenge, I suggest a distinct operational structure for impact funds designed to create a balance between meaningful impact and financial returns – which is the basic principle of impact investing. Only when we are able to create a unique identity and position for Impact Investments can we expect the capital flows intended for impact to rightly flow toward impact investing and generate positive outcomes for the investors, society, and environment.
