Social impact investing aspires to generate a meaningful social or environmental impact alongside a financial return
Though “Impact investing” has existed in various forms for many years, the concept has gained substantial momentum in the past decade. Investors of all types – private and public sector, philanthropic and for-profit – are seeking solutions that achieve both a social impact and a positive return by investing in initiatives that are more sustainable and efficient. Many of these solutions are leveraging proven business practices, such as growing an earned revenue stream, in order to enhance sustainability and scale in new ways.
Environmental, Social and Governance (ESG)/Socially Responsible Investing (SRI)
The term “impact investing” is broad and encompasses a wide range of investor types and asset classes. Among many endowments, institutional investors and investment funds, the concept of impact investing generally refers to “Socially Responsible Investing” (SRI), or the aligning of investment dollars with a given organization’s ideals around Environmental, Social and Governance (ESG) practices. SRI typically places the importance of financial returns above or equal to the desire for social or environmental impacts, which often are achieved by various forms of either selective investment strategies (i.e., a fund focused on energy efficiency) or negative screening (i.e., omitting investments in tobacco, firearms and mountaintop mining). SRI practices are also increasingly stretching across asset classes, to include private equity, venture capital and alternatives in addition to traditional equities and fixed-income investments.
Place-based, or Community-based, Impact Investing
In contrast to SRI and ESG, place-based impact investing prioritizes generating a measurable social impact over obtaining a market-rate financial return. Many private angel and venture investors, community foundations, private and family foundations and public sector officials are approaching local social challenges through investing debt or equity capital, along with traditional forms such as grants. Many of these investments are subsidized, or below-market, and also range across all asset classes. The result is influencing a transformational shift in how local social challenges are addressed at the community level.
Investors are actively investing in a range of business models that represent a continuum of strategies for achieving impact. The various models employed offer investors solutions to social issues that fit various levels of risk tolerance and return expectation.