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Definition of impact investing

investment, impact investing

Impact investment has seen a rise in popularity in recent decades, as more investors consider committing their money to solutions-driven entities focused on addressing social, environmental and economic issues.

This investment vehicle has also seen great progress in Australia that fund management companies and banks have included impact investments as part of their diversified portfolio offerings. Despite the sector’s growth, however, there is still much to learn about impact investments.

Here’s a quick look at impact investments for those who want to get started.

What are impact investments?

Impact investments are financial investments transformed into private companies, not-for-profit organisations, funds, projects, and social enterprises. These created entities aim to create measurable solutions to social, environmental and economic issues, with the knowledge that governments, foundations and not for profit organisations cannot solve the issues by themselves.

While ethical investments are satisfied with funding entities that don’t negatively impact the society or environment, impact investments take things a step further by funding entities that generate positive impacts or find solutions to pressing issues.

Ethical investments usually fund existing entities while impact investments focus on funding issues. That is, investors can fund either existing foundations and trusts aiming for the same measurable outcome, or the expected outcomes which are turned into projects, organisations, or institutions composed of entities from the private and public sectors.

Funding is not a free ride for entities because investors expect both financial returns and measurable impact (solution) from these entities. However, financial returns are usually due when the funded target has been reached.

How does investment impact economic growth?

Impact investments expand the funding opportunities that may be used for developing innovative solutions to social and environmental issues and shares the accountability for the investment’s achievements.

Since impact investments are required to produce and apply innovative and measurable solutions to pressing problems, along with providing financial returns, investors are readily able to see the benefits resulting from their injected funds.

The idea of funding impact investments becomes more enticing when an entity’s purpose aligns with the changes investors want to see.

This positive cycle drives more funding for impact investments and generates solutions to pressing problems while motivating active social involvement—with a bonus of investment diversification and financial gain with each accomplished goal.

Impact investments also provide grants for entities that are willing and able to deliver the expected results from the issues in focus.

What is social impact investing?

Social impact investments are projects and entities that aim to find innovative approaches to various social issues, both within a country and in other parts of the world.

The social impact investing (SII) approach was developed as a collaborative effort among governments, social entities (organisations, enterprises, etc.), communities, service providers and investors to discuss, tackle and solve complex social and environmental issues. SIIs take advantage of funding from governments and private investors to discover evidence-based solutions for its potential beneficiaries.

Some of these SII projects are geared towards:

  • Improvement of housing and welfare for the youth
  • Provision of financial education for indigenous Australians
  • Improving employment opportunities of African Australians
  • Rehabilitation for former prisoners
  • Improving the quality of care for aged individuals
  • Crisis support services
  • Climate change/ Renewable Energy

What makes impact investments different from corporate social responsibility?

Companies with a devoted team for corporate social responsibility are usually focused on ensuring that the business does not contribute to, or aggravate, existing social, economic and environmental issues.

Impact investments, on the other hand, focus on producing sustainable, measurable and positive solutions to existing issues—from environmental and social rehabilitation to aged health care.

Where can I find impact investments?

When searching for impact investments, the first thing to know is what it is supposed to look like.

Impact investments comes in the form of equities (shares), bonds, real assets, managed funds and hybrid investments, among others.

Investors can either have their financial adviser, fund manager or broker track down existing SIIs for their portfolio. They can also approach a trust, foundation, not for profit organisation or any social and environmental entity they support to ask whether they are impact investment ready.

How can my company be impact investment ready?

The impact investment market is still relatively new in Australia. However, the government’s expression of support for SIIs in early 2017 is sure to generate traction for its growth.

Companies, foundations, trusts and other entities that wish to receive support for their social and environmental goals through impact investing are required to be impact investment ready.

This means the organisation must have the capacity and capability to utilise the investments, as well as produce the expected returns, both in terms of financial and social or environmental impact.

Investment readiness providers from impact investment networks, financial institutions and the government should be able to give the necessary support to organisations that want to become investment ready to foster impact investing strategies.

This information has been sourced from the Australian Department of the Treasury and Impact Investing Australia.

Definition of impact investing
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