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Impact investing is the term for the deployment of investment capital with not only consideration of financial returns, but also social and/or environmental considerations. Explore the radical frontiers and innovative examples of impact investing at work.
“All investing has an impact that is largely opaque to the investor, and I think that the work of our field, in part, is to make that impact, positive and negative … transparent to the investor so that the investor can choose.”
— Fran Seegull, Executive Director of the U.S. Impact Investing Alliance
- What Is Impact Investing?
- Innovative Impact Investing Example: Private Equity (Venture)
- The Impact Investing Ecosystem
- Innovative Impact Investing Example: Cash Alternatives, Private Debt
- The Impact Investing Movement
- Innovative Impact Investing Example: Private Debt
- Impact Investing and Financial Returns
- Innovative Impact Investing Example: Public Equities
- Impact Investing and Market-Rate Returns
- Innovative Impact Investing Example: Private Equity, Private Debt
- What Is the Difference Between Impact Investing, ESG Investing, and Socially Responsible Investing?
- Innovative Impact Investing Example: Public Equities
- How to Get Into Impact Investing: Resources and Ways to Start
What Is Impact Investing?
Impact investing is the term for the deployment of investment capital with not only consideration of financial returns, but social and/or environmental considerations as well. While the term “impact investing” is relatively new, being coined in 2007, the idea of sustainable investing has existed for much longer. One of the first modern funds was the PAX World Fund, now the PAX Sustainable Allocation Fund, which was launched in 1971 in opposition to the Vietnam War. Impact investing has since grown to encompass a huge variety of investment strategies across asset classes, impact areas, sectors, and geographies.
“When we coined the phrase ‘impact investing,’ one of the reasons we chose it was very intentionally to capture two fundamental camps or points of view,” says Antony Bugg-Levine of the Nonprofit Finance Fund, who was one of the people present when the term impact investing was termed, in this episode of our Money + Meaning podcast. “One was people who said, ‘Capitalism is the greatest thing the world has ever had, I want to steer that potential toward more social purpose.’ There was another group — and this tension has continued — who felt that wasn’t good enough. The purpose wasn’t to keep the investing systems in place and unlock more capital, it was to fundamentally change the way investing worked.”
While impact investing currently accounts for an estimated 33% of all assets under professional management, its influence is growing rapidly. In 2020, the amount of money invested in environmental, social, and corporate governance (ESG) funds doubled compared with 2019 and accounted for nearly a quarter of all the money in U.S. stock and bond mutual funds — a substantial increase from just 1% in 2014.
Here we share what you need to know about impact investing: what it is, why the incredible recent growth, and what it looks like in practice. While the field is still evolving, we have leaned into our community to provide the resources and overview shared here.
Innovative Impact Investing Example: Private Equity (Venture)
Prime Impact Fund
Asset Class: Private Equity (Venture)
In 2020, the Prime Coalition raised $50mm for its new early stage venture fund, Prime Impact Fund. The fund invests in high-risk, high-reward technology companies that have the potential to “grow into historically significant, planetary impactful companies.”
You can watch Sarah Kearney, Executive Director of the Prime Coalition, at SOCAP19, where she discusses ways that patient capital can deliver financial returns while accelerating climate-smart forestry and agricultural practices worldwide. Sign up to receive this conversation, along with a collection of innovative impact investing examples, in your inbox:
The Impact Investing Ecosystem
Impact investing is the umbrella that encompasses much of the work being done in the SOCAP community. From large asset owners, such as foundations and family offices, to individual retail investors, innovative investments are being made across industries, sectors, geographies, and asset classes. While the people doing this work come from varied industries and pursuits, they collectively can learn from, benefit from, and expand the reach of impact investing:
- Social Entrepreneurs seeking funding for their enterprises can find alternative financial models and long-term partners in the impact investing community.
- Business leaders can gather insights on bringing a stakeholder mindset into their organization and discover how to include environmental, social and governance factors throughout their operations.
- Retail investors, which includes anyone with a bank account and 401(k) or other retirement plan, can now find options that keep their money out of sectors they don’t agree with, such as fossil fuels, and put the money into impact, like renewable energy infrastructure.
- Foundations can align the investment of their endowment with the mission of their philanthropic giving to leverage organizational impact.
- Financial advisers and intermediaries can learn how to speak to clients about impact, identify relevant securities, and expand opportunities to build their book and retain assets with the impending wealth transfer.
- Asset Owners can align investments with their values, and seek out best practices and strategies.
Innovative Impact Investing Example: Cash Alternatives, Private Debt
Asset Class: Cash Alternatives, Private Debt
CNote is an impact investing platform that allows both individual and institutional investors to invest in underserved communities across the U.S. while generating competitive financial returns. By partnering with community development financial institutions (CDFIs), investments in CNote help fund underrepresented founders, support affordable housing development, and improve financial inclusion and economic mobility.
You can watch Cat Berman, CEO of CNote, in the SOCAP panel “Unlocking CDFIs as an Emergency Response System for Communities and People of Color.” Sign up to receive this conversation, along with a collection of innovative impact investing examples, in your inbox:
The Impact Investing Movement
Philanthropic capital is not enough to solve the intractable problems facing our society. The current economic system, while generating massive amounts of wealth, has led to the worst wealth inequality in history with the three richest Americans owning more wealth than the bottom 50 percent. In addition, there is a continued inability, or unwillingness, in the market to price in negative externalities — such as the “cost” of the environmental damage of a supply chain decision— versus solely reviewing the cost of the goods and labor. With climate disasters becoming increasingly common and high levels of social and political unrest around the globe, there is a growing urgency to find new levers to pull to create sustainable change. The disparities revealed by COVID-19 and the murder of George Floyd has further added to the urgency of creating an economic system that works for everyone. Impact investing represents a tangible way for people to support the type of world they want to live in.
Matt Patsky, CEO of Trillium Asset Management, a leader in socially responsible investing with almost $5B in assets under management, discussed the increased interest he is seeing in aligning investments with values in this Total Impact session. “We’re seeing a lot of movement of high net worth into ESG funds. We’re also getting more calls from retirement plans, particularly 401(k) plans. Companies are offering 401(k) options that are more in line with their employees’ values.”
“I agree there is more demand for the ‘S’ [Social in ESG investing],” adds John Hale, Head of Sustainability Research at Morningstar, in that same session. “Sustainable investors can be an important impetus for companies to move toward sustainability and they can serve as an ally to those who are clearly doing so. Think of what happens when a company sees that a significant and growing proportion of its investor base wants it to move away from a sole focus on shareholders. They start to change, and it makes them easier to change. … Sustainable investing is an important support mechanism to this more purposeful capitalism.”
As the risks from global issues heighten, investors, fund managers, and advisers looking to mitigate risk are joining those who have been building the impact investing space to increase uptake. With demands from the world’s biggest players on ESG performance and reporting, impact investing is quickly going mainstream.
As impact investing interest grows, the field cannot accept “less harm done” as enough. Impact investors must continue to test the limits of what’s possible, and of how much can be reinvented. Importantly, investors and all leaders also must also examine their power and dismantle white supremacy within their organizations. In this SPECTRUM conversation, leaders Rashad Robinson, Crystal Echo Hawk, and Cynthia Muller examine the ways in which systemic issues are perpetuated and delve into solutions that can be amplified, especially in this moment of national reckoning around racial justice. As Robinson says, it’s not a question of innovation, but a question of power. “It’s really important that we remember that people don’t experience issues, they experience life. The forces that hold us back are interrelated; political inequality goes hand-in-hand with economic inequality,” Robinson says.
Innovative Impact Investing Example: Private Debt
Asset Class: Private Debt
The 1863 Fund, a new initiative from 1863 Ventures, invests in historically marginalized entrepreneurs using revenue-based financing, a form of debt that better aligns the outcomes for investor and entrepreneur and allows the entrepreneur to maintain higher levels of ownership of their company.
You can listen to Melissa Bradley, the founder of 1863 Ventures, discuss the economic imperative to support marginalized entrepreneurs on Money + Meaning. Sign up to receive this conversation, along with a collection of innovative impact investing examples, in your inbox:
Impact Investing and Financial Returns
Since the earliest days of impact investing, there have been debates about whether achieving a positive social and environmental outcome necessitates concessionary, or below market rate, financial returns. In the public markets, where data is much more readily available, 2020 represented a turning point in the discussion.
As Jon Hale of Morningstar notes, in 2020 the number of sustainable funds grew by 30%, net flows into these funds were over $50B, and “sustainable funds comfortably outperformed their conventional fund peers in 2020, especially equity funds.”
While private markets tend to be much more opaque and therefore direct financial comparisons are more challenging, the level of rigor and risk management associated with impact investing can improve financial returns in other asset classes as well. As Ian Simmons, co-founder and principal at Blue Haven Initiative, says in this Total Impact video, “It’s possible to invest with higher standards and even outperform the market. We look to find best-in-class solutions from a financial performance perspective as well as from a positive social impact perspective. By having that drive to understand what the money is doing and what effect it is having in the world, we think we’re actually elevating the quality of conversation as an investment committee and applying a more rigorous set of standards to our asset managers.”
Innovative Impact Investing Example: Public Equities
Domini Sustainable Solutions Fund
Asset Class: Public Equities
The Domini Sustainable Solutions Fund (ticker: CAREX) has a global portfolio of public companies providing solutions for a better world. From renewable energy to medical systems to healthy and organic food, the fund targets well-managed companies supporting the transition to a sustainable economy. They operate with a buy and hold strategy under the investment thesis that companies addressing environmental and social challenges provide long-term growth potential.
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Impact Investing and Market-Rate Returns
Beth Bafford of Calvert Impact Capital flips the discussion on its head during her appearance on the Money and Meaning podcast: “I take a different view on this whole question of market-rate return and impact. The problems that we’re facing right now are immediate. So, if I’m investing and can get 20 basis points more but my kids don’t have access to clean water, or we are in a situation where democracy has failed and there is social uprising because of so many structural inequities that face our world, it’s not worth it. That’s not to say that I think these investments will underperform — I don’t; I very much think they will be strong performers — but that’s also not what I’m optimizing for. I’m optimizing for doing everything in my power to make sure that this world is better for my kids than it was for me. ”
While there are many opportunities to invest in securities that both provide market-rate financial returns and achieve impact, there are certain sectors and geographies where concessionary, “impact-first” capital is required. As Greg Neichin, Director at Ceniarth, put it on an episode of our Money + Meaning podcast, “In places where the market is not functioning, in places where markets have left people behind, low-cost money is required in order to make a difference in the lives of poor, marginalized, vulnerable communities.” As Greg notes, even though these investment opportunities may require lower financial returns, that doesn’t necessarily mean they require outsize risk, “One of the misunderstood things about impact-first capital is that you’re taking on some extreme risk by pursuing these opportunities. …The real sacrifice or ‘concession’ that we make is that most of these opportunities need low-cost, patient capital – lower cost than any commercial or market-rate investor would be willing to bring to a deal.” For some investors, this opportunity for outsize social or environmental return more than compensates for lower financial returns.
In situations where achieving market-rate capital is not realistic, a host of innovative financial tools have sprung up along the entire “capital spectrum,” or the area between -100% returns of philanthropic capital and market-rate returns of “finance-first” investments. Some of these tools include: “catalytic capital” investments, where the investor agrees to a lower financial return in order to incentivize market-rate capital into a deal; recoverable grants, where donors can potentially receive their capital back; social impact bonds, where the funder gets paid back with interest if certain social impact outcomes are achieved; and many other innovative investment structures.
Innovative Impact Investing Example: Private Equity, Private Debt
Asset Class: Private Equity, Private Debt
The Employment Technology Fund (ETF@JFFLabs) invests in early stage technology companies that create opportunities for economic advancement for those struggling to succeed in the U.S. labor market. The fund supports innovative entrepreneurs working to increase access to learning, employment, and economic mobility, thus building toward a more equitable and inclusive future of work.
You can watch a webinar discussion exploring the opportunities for impact investors to address the major unemployment challenges we are likely to face in the coming months and years that features Joann Chen, Director of Employment Technology Fund. Sign up to receive this conversation, along with a collection of innovative impact investing examples, in your inbox:
What Is the Difference Between Impact Investing, ESG Investing, and Socially Responsible Investing?
Although all of these terms technically have distinct definitions, they are most often used interchangeably, with the exception of ESG investing that is used often in public equities and for classifying funds for universal investors. In general, impact investing is an umbrella term and can be used as a broad synonym for ESG investing and socially responsible investing.
ESG investing describes investments that are made with environmental, social, and corporate governance (ESG) criteria as an explicit focus of the investment. These often involve investment screens, either positive or negative, to shrink the field of investable companies based on environmental, social, or governance factors. An example of an ESG screen would be removing oil and gas companies from investment consideration (a negative environmental screen) or choosing to only invest in companies with diverse leadership teams (a positive governance screen).
Socially responsible investing (SRI) is a method in which investments are made with the intent to create social change. SRI investments can include those made to empower marginalized communities, increase workforce diversity, and break down systemic barriers in the economy.
Once seen as a potential burden on both corporations and investors, environmental, social, and governance factors are more and more being seen as a way to gain competitive advantage. Issues like climate change and social unrest represent important considerations when evaluating a company’s long-term viability. As SOCAP contributor Mark Newberg of Stockbridge Associates put it, “When it comes to ESG, think about it like this: If Milton Friedman were alive today, he’d say that ‘risk’ and ‘volatility’ are financially material factors. And those are the kinds of factors management is obligated to consider.”
Innovative Impact Investing Example: Public Equities
Adasina Social Capital
Asset Class: Public Equities
The Adasina Social Justice Index (ticker: JSTC) is an exchange-traded fund that uses data to screen public companies for issues that impact underserved communities along lines of racial, gender, economic, and climate justice. Specific to racial equity, the fund evaluates companies on whether they participate in, or in any way benefit from, issues that exacerbate racial inequities. This includes screens for prison involvement, immigrant detention, bail lending, and for-profit education, among others.
You can watch Rachel Robasciotti, Founder & CEO at Adasina Social Capital, at SOCAP20 Virtual on Achieving True Racial Equity in Asset Management and Deployment Spaces. Sign up to receive this conversation, along with a collection of innovative impact investing examples, in your inbox:
How to Get Into Impact Investing: Resources and Ways to Start
Impact investing is an effective, powerful tool for addressing racial and gender wealth gaps throughout the world, accelerating the creation of regenerative solutions to help combat climate change, and creating strong foundations of community wealth. As Rehana Nathoo of Spectrum Impact noted in this episode of our Money + Meaning podcast, “We’re in a position now where we have a very good evidence base of impact investment products in every asset class. We’ve started to be able to point to each and say ‘An impact investment here looks like x.’”
For more background on impact investing: Listen to these two introductory Money+Meaning podcast episodes: Impact Investing 101 with Rehana Nathoo and The History of Impact Investing with Antony Bugg-Levine.
Access toolkits and investing resources from our network: Find lists of curated resources and toolkits from Spectrum Impact, the Global Impact Investing Network (GIIN), and the U.S. Impact Investing Alliance.
If you are considering starting to align your own investment with your values, a good place to start is by asking questions. Ask what your money is supporting, get the answers, and decide if you’re satisfied with those answers, says Beth Bafford of Calvert Impact Capital in this Money + Meaning podcast episode. “There is a very strange dynamic in the world of finance where if you don’t work in finance, you think it’s too opaque,” Bafford says. “It’s very simple. Your money is going to support some sort of economic activity. You can decide whether you want to support that economic activity or not and, if you don’t, there are options to change it.”
Find out what your bank is doing with your money and find a bank that invests aligned with your values at Mighty Deposits.
Get active as a shareholder: Organizations like As You Sow and The Shareholder Commons are helping the average shareholder take collective action to change the way public companies are behaving for the better through the power of their investment.
Stay in touch with the SOCAP community by joining SOCAP Assembly, our free social connection platform where the impact community can work directly for radical collective action and positive change. Together, we can unlock the power of markets for impact.
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