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Complete Guide to Impact Investing

For centuries we’ve relied on the same model to address the world’s most urgent social challenges. On the one hand, you make a living. On the other hand, we give back by paying taxes and donating to charity.

But despite the tirelessly good work of philanthropy and governments, many economists agree that the combined efforts of these sectors are no match for the magnitude of the world’s social problems.

Many economists also agree that having the power of the private sector has the potential to narrow the gap. This new wave is attracting an increasing number of investors.

The movement has been dubbed Impact Investing.

Impact Investing is innovative. It’s disruptive. And it’s 77 billion dollars global industry. 

As an emerging model, there’s still much debate surrounding the variation and even the definition of Impact Investing.

In this guide, you will find everything you need to know about Impact Investing

IMPACT INVESTING IS NOT PHILANTHROPY OR CHARITY

Impact Investing emerged as a result of the failure of philanthropy to address social problems.

Despite an impressive 15% annual growth rate, philanthropy did not make the world significantly better, safer, less polluted or healthier. This is because rich donors are disconnected from the real problems of the poor. They’re also fickle and frequently change their opinion about worthy causes. 

Impact Investing aims to solve the problem by allowing money to flow to local entrepreneurs, who can solve local social problems in a sustainable, for-profit way. These entrepreneurs are best positioned to understand local problems such as inadequacy of local education, local healthcare, poor food supply and access to clean water.

NOT EVERY SOCIALLY INCLINED INVESTMENT IS IMPACT INVESTING

A company that donates one pair of shoes to impoverished areas of Africa for every pair it sells in the UK can abandon its operations in Africa without any harm to their core business. Investing in this company might only be supporting shoe production in the UK.

Similarly, buying stock in a public solar energy company doesn’t contribute to additional green energy creation, since no additional money flows into the company. 

But for this interaction, we’ll simply examine how Impact Investing blurs the line between traditional giving and traditional investing.

Impact Investing targets companies that aim to create an additional impact as the core of their business.

EXPECTING FINANCIAL RETURN IS IMPORTANT FOR MANY REASONS

Impact Investing is investing after all. Generating a return is important to attract money. 

Besides, requiring financial returns also sets a high bar for businesses seeking funding.

Investing in a business that is not expected to make money is like donating to charity. Impact investors don’t support short-term solutions as many charities do. They want to invest and jumpstart a profitable business that will solve social problems in the long-term. 

Only long-term sustainable solutions can move us closer to our goal of a better society. 

RECOMMENDED BOOKS ON IMPACT INVESTING 

At Impacto, we believe impact investments have the potential to transform business and society. This is why we’ve curated a list of the best books you can read If you want to dive deeper into this fascinating subject. 

Here’s our pick of the best 5 books on impact investment, from beginner to professional level:

  • The Power of Impact Investing

Written by Judith Rodin, Rockefeller Foundation President, and Margot Brandenburg, mission-driven entrepreneur. The authors are two of the foremost experts in the field.

In this book, you will learn how investing compares to philanthropy and traditional investments, where opportunities are woven around the world and how to get started. As its name suggests, this book will help you better understand the true power of impact investment. 

Recommended for: Beginners 

  • Investing with Impact: Why Finance is a Force for Good

The author, Jeremy K. Balkin, makes the case that the finance industry can improve the state of the world by positively influencing the allocation of capital.

 Think of this book as the anti-wolf of wall street. In this book, Balkin challenges the status quo on mainstream investing by embracing the 1 trillion dollar frontier impact investment market opportunity. The book demonstrates that if you can change the culture of finance you can change the world for the better.

Recommended for: Skeptical finance professionals.

  • Measuring and Improving Social Impacts: A Guide for Nonprofits, Companies, and Impact Investors

If you’re looking for a comprehensive resource to guide you through impact measurement, this book is for you. 

Based on years of research and analysis of field studies from around the globe. The authors offer a 5 step process that will help you gain clarity about the impacts that matter most to you. You will be provided with measuring methods and tactics to improve your impact outcomes. 

In this practical book, the authors outline a systematic approach to defining what resources you should invest in, what problems you should address, and what activities and organisations to support. 

Recommended for: Impact practitioners 

  • The Impact Investor: Lessons in Leadership And Strategy For Collaborative Capitalism

What kind of leader are you? Is profit still the driving force of your business?. If so, this book is for you. 

The offer author precise details on what exactly impact investing entails embody din the experiences and proven practices of some of the world’s most successful impact investors, across asset classes, geographies and areas of impact. Only true leaders can combine purpose with profit, successfully. 

Recommended for: Impact practitioners

  • Catalysing Wealth for Change Guide to Impact Investing

This is a holistic bible of impact investment. for foundations, financial institutions, and private investors. It contains a wide range of key tools and resources including investors networks, practical examples of impact portfolios, in-depth interviews with leading impact investors around the world, conferences and accelerators. It’s a practical, thoughtful and comprehensive resource.

Recommended for: Everyone with an interest in impact investment 

FREQUENTLY ASKED QUESTIONS

What is the most accepted definition of Impact Investing?

The International Finance Corporation (IFC) defines impact investment as:

 “investments made into companies, organisations, vehicles, and funds with the intent to contribute to measurable positive social, economic and environmental impact alongside financial returns.”

What do impact investors look for?

Impact investors are looking for intentional outcome orientation for the investment they choose to make. Ultimately impact investors seek a double bottom line return. Both a financial and a social return. 

How does Impact Investing differ from Socially Responsible Investing?

Impact Investing goes beyond investing responsibly which might reduce harmful side effects. It’s about proactively making a positive contribution to society’s biggest challenges.

Socially responsible investing is making investments based on your values. It’s typically done by excluding companies that don’t align with those values. Such as weapons manufacturers, oil companies nuclear power, adult entertainment, gambling, tobacco, etc.

These are companies that are excluded from a Socially Responsible Investment portfolio and they use ESG data (Environmental Societal and Governance data) to determine what to exclude.

Who can be an Impact Investor?

Anyone. Impact investing makes sense for us all. You can either save your money in a bank account, and risk losing its value over time as a consequence of inflation, or, you can invest. And even better, you can invest in society. Some examples: 

  • A venture capitalist purchasing stock at a clean technology company. 
  • An experienced investor buying a bond to buy infrastructure that reduces water pollution.
  • A large bank backing an evidence-based early education programme. 
  • Millennials financing a kickstarted campaign for their first fair trade apparel factory in Africa. 

What’s the first step to Impact Investing?

The very first step to take in impact investing is to choose a cause that you truly care about.

According to Stanford Business School Professor, Paul Brest; 

“Deciding what area you want to have an impact in should be the first step in anyone’s impact investing journey. While financial returns are the same regardless of what you invest in, Impact Investing requires a degree of intentionality”.

What are some common approaches to Impact Investing?

First, an impact strategy can take a clean hands approach, proactively screening out stocks in the so-called sin stocks such as tobacco, alcohol, weapons, and gambling.

Second, a strategy can take an active position on certain environmental or governance factors by overweighting securities in specific industries. That way industry leaders can take on clean energy, workers’ rights, and diversity.

Third, Impact managers can make a difference at the corporate level by voting proxies and sitting on committees to shape policies to bring pressure on companies to make positive changes. 

Do you have a question that wasn’t covered in our FAQs? Let us know in the comments below.