Core characteristics of impact investing

The practice of impact investing is further defined by the following four core characteristics:

 INTENTIONALITY An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing. 

 INVESTMENT WITH RETURN EXPECTATIONS Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital. 

 RANGE OF RETURN EXPECTATIONS AND ASSET CLASSES Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity. 

 IMPACT MEASUREMENT A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field. 

Investors’ approaches to impact measurement will vary based on their objectives and capacities, and the choice of what to measure usually reflects investor goals and, consequently, investor intention. In general, components of impact measurement best practices for impact investing include:

• Establishing and stating social and environmental objectives to relevant stakeholders
• Setting performance metrics/targets related to these objectives using standardized metrics wherever possible
• Monitoring and managing the performance of investees against these targets
• Reporting on social and environmental performance to relevant stakeholders

Why impact investing?

Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.

The impact investing market offers diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns.

Many types of investors are entering the growing impact investing market. Here are a few common investor motivations: 

• Banks, pension funds, financial advisors, and wealth managers can PROVIDE CLIENT INVESTMENT OPPORTUNITIES to both individuals and institutions with an interest in general or specific social and/or environmental causes.
• Institutional and family foundations can LEVERAGE SIGNIFICANTLY GREATER ASSETS to advance their core social and/or environmental goals, while maintaining or growing their overall endowment.
• Government investors and development finance institutions can PROVIDE PROOF OF FINANCIAL VIABILITY for private-sector investors while targeting specific social and environmental goals. 

Who is making impact investments?

Impact investment has attracted a wide variety of investors, both individual and institutional. 

• Fund Managers
• Development finance institutions
• Diversified financial institutions/banks
• Private foundations
• Pension funds and insurance companies
• Family Offices
• Individual investors
• NGOs
• Religious institutions

How do impact investments perform financially?

Impact investors have diverse financial return expectations. Some intentionally invest for below-market-rate returns, in line with their strategic objectives. Others pursue market-competitive and market-beating returns, sometimes required by fiducuary responsibility. Most investors surveyed in the GIIN's 2017 Annual Impact Investor Survey pursue competitive, market-rate returns.

Respondents also report that portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.

Although very few investors report significant risk events in their impact investing portfolios, business model execution and management is by far the most often cited contributor to risk.

A comprehensive review of available research to date on the financial returns of impact investments are available in the GIIN’s report, GIIN Perspectives: Evidence on the Financial Performance of Impact Investments. The report evaluates over a dozen studies—produced by a wide range of organizations—on the financial performance of investments in three common asset classes in impact investing: private equity, private debt, and real assets, as well as individual investor portfolios allocated across asset classes.

More data on financial returns of impact investments are available in the 2015 Introducing the Impact Investing Benchmark study, which looks at financial performance of private equity and venture capital impact investments, as well as the second report in the financial performance series, published in May 2017, The Financial Performance of Real Assets Impact Investments. Both of the reports were produced in partnership with the global investment advisory firm Cambridge Associates.

Global examples of impact investing

These impact investments illustrate the diverse ways that investment capital can be used to generate positive social and/or environmental impact alongside financial returns. 

Explore how impact investing is improving the lives women in Bolivia, the people and environment of Mongolia, and bilingual communities the United States.

Impact investing funds

Many impact investors choose to invest through funds whose social, environmental, and financial goals match their own. Managed by the GIIN, ImpactBase is the online global directory where investors go to find impact investment products.

How big is the impact investing market?

Impact investing is a relatively new term, used to describe investments made across many asset classes, sectors, and regions. As a result, the market size has not yet been fully quantified. However, the aggregate assets noted below indicate that the market is substantial, with significant potential for growth.

Data source: GIIN's 2017 ANNUAL IMPACT INVESTOR SURVEY & the GIIN's IMPACT INVESTING TRENDS: EVIDENCE OF A GROWING INDUSTRY

What is the current state of the impact investing market?

While some investors have been making impact investments for decades, recently there has emerged a new collaborative international effort to accelerate the development of a high- functioning market that supports impact investing. While this market is still relatively new, investors are optimistic overall about its development and expect increased scale and efficiency in the future.

Impact investors generally recognize broad progress across key indicators of market growth...

... but also acknowledge that some challenges remain.