Impact investing is an investment strategy which aims to produce particular social or environmental benefits alongside a financial gain.
Fundamentally, impact investing seeks to reduce the negative effects of business activity on our natural and social environment and is as a result often thought of as an extension of philanthropy.
Impact investments can take the form of various asset classes, and often result in multiple outcomes. Impact investments may take several types of forms of capital and investment vehicles.
As with any other type of investment, impact investments offer investors a range of opportunities for financial return.
However, most significantly, impact investments present an investor with the opportunity to make financial gains while doing an active part to ease some social or environmental issue.
Impact investments comprise of a range of opportunities for investors, who may invest their money into emerging markets or developed economies.
Their investment can cover a broad range of industries including healthcare, education, clean and renewable energy and agriculture.
A large part of impact investing is done by institutional investors, such as hedge funds, private foundations, banks, pension funds and other fund managers.
However, the doors for individual investors to place their money in impact investments are opening, as various socially conscious financial service companies, web-based investment platforms, and investor networks are now present individuals with the chance to get involved.
Microfinance loans, which help furnish small-business owners in emerging markets with startup or expansion capital, are also becoming a main impact investment strategy.
Environmental, social and governance investing (ESG) and socially responsible investing (SRI) are two approaches to impact investing.
Environmental, social and governance expresses a set of criteria which establish a set of standards for a company’s behaviour, and it is used by socially conscious investors to filter potential investment opportunities which align with their social and environmental goals.
ESG factors are used to enhance markers of financial analysis beyond technical valuations, by highlighting any risks and opportunities associated with a business model or investment.
While there is a strong consideration to social and environmental consciousness, an ESG valuation remains as a tool to achieve its main objective of financial return.
Socially responsible investing (SRI) goes further than ESG practices by actively picking out or eliminating specific investments in accordance with particular ethical guidelines.
Impact investing largely interests younger generations who make it an important goal to give back to their society and aim to do their part to relive the climate crisis.
The more young people find appeal in impact investing, the more likely impact investing is to expand as investors gain influence in the market.
And as more people act on the social and financial benefits of impact investing, more companies will engage in social responsibility and environmental initiatives.