Institutional and individual investors are doing it, fund managers are doing, UK Prime Minister David Cameron even gave a keynote address at the 2013 G8 Social Impact Investing Conference in London on it; but what is impact investing?
By name, it seems to be part-investment, part-philanthropy, but is it more one than the other? Amy Bell, the Executive Director and Head of Principal Investments for J.P Morgan’s Social Finance business unit defines impact investing as “the deployment of capital with an expectation of financial return, where the success of the investment is also contingent upon achieving a state social or environmental goal.”
These investments can be made in both emerging as well as developed markets, and focuses on a variety of returns from below to market rate. The impact investment market is able to bestow capital upon some of the biggest issues impacting the world today, including housing, healthcare, and education as well as sustainable agriculture, clean technology and more.
There are four core characteristics when it comes to impact investing:
- Intentionality- essential to getting involved in impact investing, investors should want to make a positive social or environmental impact just as much, if not more, than they want to make a profit.
- Expectations- while philanthropic, these investments are still expected to generate a financial return on capital for the investors. At the very least, investors should expect a return of capital.
- Range of return expectations and asset classes- targeting financial returns that range anywhere from below market to risk-adjusted market rate. These returns can be made across asset classes including cash equivalents and private equity.
- Impact measurement-when entering the impact investment market, investors make a commitment to measure and report the social and/or environmental performance and progress of any underlying investments. They should uphold transparency and accountability at all times.
While impacting investing is a relatively new market, it is a rather substantial market with significant potential for expansion. Watch David Cameron’s keynote speech below discussing the importance of impact investing and how it needs to be adopted worldwide.