What is Impact Investing? Meaning, Types and Examples

Everyone invests money in some way. But does it fulfill any other purpose apart from returns? If not then it should. Impact investing is an excellent way to give your investment a meaning. 

In this post, we will understand the meaning of Impact Investing in detail along with its types and lots of examples.

It doesn’t matter if you are reading about it for the first time or looking to get deeper into this concept. This blog will cover everything for you. So, delve into it and learn about Impact Investing together.

Meaning of Impact Investing

The millennials and the Gen-Z are increasingly following the Impact Investing approach. But what exactly is it? 

It is an approach that deals with following various investment strategies that lead to societal and environmental benefits along with high returns for the investors. People are becoming more proactive with every single dollar they are spending.

According to David Spika, CIO & President of GuideStone Capital Management- “ Impact Investing provides a way for investors to be more proactive with their investment dollars and partner together to make purposeful investments that can contribute to affecting real change across the globe,”

An important thing to know here is that this approach is not like charity. Investors are equally keen to earn higher profits/returns on their investments. The difference is just that they want to give to the environment and society.

It’s a matter of having multiple goals out of which profit-making is the priority. Here is a simple example to help you understand this strategy.

Suppose an investor wants to put money in a company. He has compared two companies with almost similar ROI. One is an oil company and the other one is a solar-panel-making company. Let’s say that the oil company provides a little more return compared to the latter.

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A normal investor would blindly choose the oil company. However, the person who follows Impact Investing will choose the solar panel company. Do you know the reason? Because it creates a positive impact on the environment. 

Types of Impact Investing

Impact Investing involves reading the CSR policies and contributions of the company. Otherwise, how will you know if the company is actually giving back?  

There is no hard and fast rule as to what are the types of Impact investing. What one needs to do is:

  1. Invest in stocks that articulate a positive impact on the environment.
  2. Financial expectations must be present. (Can be less than normal investing)

There are generally two kinds of Impact investing. Both these kinds are beyond the normal investing style with the aim of helping society. Though there are minute differences between ESG and SRI. The main objective remains the same i.e. lesser negative effect.

1. ESG Investing

It is one kind of Impact investing. Because it checks all the right boxes- environmental, social, and governance The main goal of ESG investing is to promote CSR but not ignore financial returns.

2. SRI Investing

Another kind is SRI. It stands for Socially Responsible Investing.  It involved selecting a set of companies with a moral and ethical aspect that most appeals to the investors.

How to compute ROI when doing Impact investing?

In order to compute the ROI in it, one can use many acceptable measures. A popular method suggested by GIIN is the “Impact Measurement and Management tool” Along with it they have introduced IRIS+ systems. The main purpose of this system is to optimize the ROIs of investors.

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Apart from GIIN, there is Bridgespan Group, which introduced the Impact Multiple of Money. It helps to calculate investment value. Another one is SROI i.e. Social Return on Investment. With so many options one can use any method they like.

Examples of Impact Investing 

Usually you will see that Institutional investors do the bulk of investment in this arena. It includes hedge funds, pension funds, banks, and fund managers. There are socially aware finance companies, investment platforms and individuals that also do it.

According to a 2020 survey by the Global Impact Investing Network (GIIN), the majority of investors (i.e. 67%) who choose impact investing look for market-rate returns.

Let’s look at some more examples of Impact Investing to understand it more deeply. Do keep in mind that this approach covers various investment strategies and assets. 

  1. Investing in tech companies that are working on ways to purify water and develop water treatment plants.
  2. Opting for mortgage-backed stocks of companies that are developing affordable housing options for people. 
  3. Opening a private finance firm to back the communities with low income, fewer opportunities, or no employment.
  4. Small Business loans or microfinance funding to entrepreneurs in under-developed or developing countries.
  5. Investing in companies that produce clean energy using biodegradable ways.
  6. Companies focused on promoting education are another example of impact investing.

Thus, the ultimate meaning of Impact Investing is- earning profits and doing something for the environment and society.

Impact Investing: Final Thoughts 

If you also want your investments to have a purpose other than returns, then Impact investing is an excellent option. In the upcoming decade or two we will definitely see a sudden spike in it. Especially in the IT and educational sector.

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But be careful where you invest. Being proactive doesn’t mean investing in any company that is helping save the environment. Do your own research and analyze the statistics properly. Put money into a business that is actually delivering societal value.

What is your take on Impact Investing? Do comment down below.

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