No other segment of investment banking is more progressive and forward-looking than impact investing—one made up of investors leveraging capital to fund enterprises whose goal is to bring about positive environmental and social change. Impact investing traces its roots back to microfinance programs for farmers and agricultural entrepreneurs in developing countries. These innovative financial products provided recipients the funding needed for seeds, farming equipment, harvesting, transportation, and more.
According to a report of the International Finance Corporation, a World Bank group, in 2020 an estimated $2.3T was poured into impact investments worldwide. Impact investing has come a long way indeed from providing farmers with affordable micro-loans.
Impact Investments vs ESG investments
Impact investing overlaps closely with ESG (Environmental, Social, and Governance) investing. But where ESG investments integrate environmental, social and governance factors to drive decision-making, measure performance, and mitigate investment risks, impact investing is more broadly concerned with investments that have the potential to make measurable social or environmental impacts. To encapsulate the distinction: every impact investment must be ESG-compliant, but not all ESG-compliant funds are designed to actively attain broader impacts.
“Impact investing provides a way for investors to be proactive with their investment dollars and partner together to make purposeful investments that can contribute to effecting real change across the globe,” explains David Spika, GuideStone Capital Management president and CIO.
Criteria for Impact Investments
For an investment to be considered a genuine impact investment, both the investor and the investment need to meet and satisfy the criteria for impact investment based on the IFC’s Operating Principles for Impact Management.
What must be true of the investor for an investment to be a genuine impact investment?
1.The investor must demonstrate the clear intention to establish specific outcomes pursued through investment, and specify the beneficiaries of these outcomes.
2. The investor must contribute to the impact, either through financial (flexible capital) or non-financial (fund portfolio) support.
3. The investor must measure the impact, establishing a measurement framework to link intent and contribution to actual improvements in social and environmental outcomes.
What must be true of the investment to be a genuine impact investment?
1. The impact must materially drive progress and result in meaningful social and environmental goals.
2. The realized impact should be fundamentally essential to the company’s business model.
It is crucial for investors to thoroughly test to see if an investment will, in fact, advance progress by an extensive analysis of company data and social science research.
The Current Impact Investment Landscape - Key Takeaways:
- Current data from reliable sources (such as IFC), value the impact investment market at $2.3T.
- As of January 2022, there are 611 impact funds raising capital, with an average target amount of $210.9M (€192M) per fund.
- Out of the 17 SDGs (Sustainable Development Goals) specifying the world's greatest challenges as laid out by the United Nations, the top 5 most targeted by impact investors are:
- Climate Action (SDG 13)
- Affordable and Clean Energy (SDG 7)
- Industry, Innovation and Infrastructure (SDG 9)
- Good Health, and Well-Being (SDG 3)
- Decent Work and Economic Growth. (SDG 8)
Top 5 capital commitments by sector
- Climate: 18%
- Renewable Energy: 18%
- Others (Aquaculture, Biodiversity, CleanTech, Circular Economy, Employment, etc.): 15%
- Social Infrastructure: 10%
- Health Services: 9%
Top investment platforms for impact investors are:
- Private Equity: 35%
- Public Equity: 18%
- Private Debt: 17%
- Infrastructure: 10%
Relevant Impact Investment Firms in the US
Norwest Venture Partners is a private equity and investment firm with over $12.5B in capital under management. A known partner to startups and developing enterprises with goals to bring change, Norwest has supported the likes of Karat (equal opportunity for black engineers and developers) and Supplier.io (supplier diversity solutions).
Vital Capital Fund is a private equity firm with an estimated asset total of $350M. With a special focus in businesses and projects based in the sub-Saharan regions, Vital Capital invests in infrastructure development, agro-industrial development, housing, education, and healthcare. Among their impact investments are the Luanda Medical Center in Angola and WaterHealth International.
The Reinvestment Fund, based in Philadelphia, Pennsylvania, is a non-profit community development financial institution with assets under management worth $1.2B. The fund provides funding to firms that focus on housing, healthcare access, education, and employment.
Interested in Exploring Impact Investing?
Finalis can help you explore the impact investment space, providing comprehensive due diligence and compliance reports that cover all the bases. Get in touch with the Finalis Insights Team to learn how Finalis can help you stay up-to-date with your industry.