Also known as socially responsible, sustainable, double, triple (or quadruple) bottom line, or ethical investing, impact investing is defined by the Global Impact Investing Network as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”
Most such investors cite their focus on environmental, social, and/or governance (ESG), with varying emphasis on one, two, or all three factors.
Although the term “impact investing” only dates to 2008, the investing philosophy has existed in various forms for centuries.
In early iterations of this investment strategy, those providing capital to business actively sought to avoid impacts that could cause harm. In the 1700s, Quakers and Methodists were admonished to avoid investments and businesses that harmed others. These included:
There are also, more recently, financiers who actively sought to make their money at the same time that they were doing good. Ben & Jerry’s Ice Cream — one of the better-known socially responsible companies — has a three-part social mission. Its values include:
Today, impact investments are on the path to becoming increasingly mainstream and increasingly popular. Such investments can be made in either emerging or developed markets, and investors may target a range of returns from below market to market rate.
Impact investors generally fall into one of three categories: impact-first investors, investment-first investors, and catalyst-first investors.
These investors primarily seek to maximize the social or economic impact of their investment. Financial returns, if there are any, are a secondary goal.
Foundations are one of the more common examples of an impact-first investor.
Under U.S. law, foundations must annually distribute five percent of their assets. So-called program-related investments (PRI) into socially responsible investments are one way foundations can distribute that money. As an added benefit to foundations, PRIs are exempt from the excess business holding tax.
In contrast, mission-related investments (MRI) do not count toward the five-percent requirement because they are intended to generate revenue as well as accomplish mission; however, foundations may use both PRIs and MRIs simultaneously.
These investors strive for market-rate or premium returns on their investments, with a positive social or environmental impact as a secondary goal. Employing this strategy, investors measure the performance of their investments by not only the financial bottom line, but also social impact, and are increasingly focused on measuring and reporting on ESG in the same way as financial returns.
DBL Investors and Generation Growth Capital are examples.
Catalyst-first investors want to give or invest in collaborations to build the impact investing industry and infrastructure. These investors typically give equal weight to both social impact as well as financial returns.
Self-designated impact investors and socially responsible organizations don’t operate in a vacuum. There are a number of other players whose participation helps support and grow the sector. Among the key participants:
Before making any impact investments, individuals and organizations should ask themselves some questions to help hone in on the most appropriate opportunities.
First, consider the choices for an impacting investing philosophy:
Individuals and organizations making large-scale impact investments — including those who are providing startup financing or those purchasing significant equity stakes in a business — will want to give addition consideration to maximizing the impact of their investment.
With the wealth of options for those interested in impact investing, the most important tool is an adept advisor to assist in weighing options, structuring transactions and financing, and overall corporate governance.
Morrison & Foerster is one of the most knowledgeable firms in this space. The firm represents:
Our work spans all aspects of impact investing, including advising companies on corporate forms and structuring transactions to help ensure impact.
For more information, contact email@example.com.