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As impact investing rises out of the niche market into the mainstream, more organizations are getting involved in investments that focus on non-traditional returns.
What is impact investing?
Impact investing is a form of socially responsible investing that creates a real impact through an investment that results in environmental and social returns in addition to financial gain.
The core characteristics of impact investing can be broken down into the following four parts: intentionality, investment with return expectations, range of return expectations and asset classes and impact measurement. Intentionality is the intent of the investor to generate impact through investments. Impact investing as an investment with return expectations is the generation of a financial return on capital. The range of return expectations and asset classes leads to generating returns ranging from below market to risk-adjusted market rate and the commitment of investors to measure and report the performance and progress of underlying investments is the final part. These all ensure transparency and accountability of impact investing.
A brief history
Gaining popularity in the early 2000s, impact investing has found its role among charities and foundations. With the potential of solving critical problems, impact investing can help address the lack of information available to investors and guide organizations in finding investments and selling them.
Though impact investing is a more recent trend, the practice of expressing social or environmental change through portfolio management began centuries ago. In the 1990s, the F.B. Heron Foundation was searching for ways investment portfolios could bolster economic development and wealth in low-income areas, balancing financial returns and generating meaningful change. It wasn’t until 2007 that the term ‘impact investment’ was set at a meeting at The Rockefeller Foundation’s Bellagio Center and has since led impact investors in activating entire portfolios across all assets and corporate engagement strategies to focus on the social and environmental goals of the organization.
Why impact investing matters
With impact investing comes the demand for accessible and reliable data that demonstrates the breadth of the field, the returns and impact spectrum offered. As more people invest, the increase in shared data will create more involvement from investors and entrepreneurs.
According to a study by Bank of America, 85 percent of Millennials are interested or actively participating in impact investing, with Sustainable Responsible and Impact Investing (SRI) assets growing 33 percent to nearly $9 trillion from 2014 to 2016.
More people are interested yet the numbers of those practicing impact investing has not changed. This gap is attributed to the lack of familiarity with this approach due to lack of data and the limited supply of impact investing products.
Without data, there is fear of the risk of impact investing though mission-related investments can be argued to increase financial returns in the long run because the investments are promoting a healthier, more sustainable and just society.
The IRS recently issued new rules on foundation investments that allow grant makers to commit more of their investments that further their missions as ‘mission related investments don’t necessarily jeopardize a foundation’s financial future and shouldn’t automatically be subject to tax’. This greater flexibility allows foundations to access a broader range of impact investments and make investment choices that have different potential social benefits, financial returns and risks.
Get involved in impact investing by investing in the planet’s future and supporting organizations that work for the greater good, socially and environmentally. Typical sectors include sustainable agriculture and development, affordable housing and healthcare, education, microfinance, financial inclusion and clean technology. For a more detailed list, visit the UN’s Sustainable Development Goals, a series of 17 directives addressing different issues affecting our planet.
Seattle Foundation has been helping philanthropists make impact investments for more than a decade. Our region is flush with entrepreneurs eager to apply private sector financing strategies and discipline to social change, but it can be difficult to know which impact investments deliver the best outcomes. Seattle Foundation’s team relies on years of expertise and in-depth community knowledge to help philanthropists make investment decisions that meet both their financial and community impact goals.
Learn more about the fundamentals of impact investing at Seattle Foundation.