What is Impact Investing

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Impact investing is a type of investing with specific objective that mean to generate both a financial gain and a positive economic, social or environmental effects Impact investing is a separation of socially responsible investing (SRI), but socially responsible investing defined as encompasses avoidance of harm while impact investing actively seek out to make a positive impact by investing. Impact investing is also called as called “investing with purpose,” as it actively pursues positive social change.

Impact investments are made into companies, organisations, and funds with the intension to make social and return on capital. Impact investments are made in both emerging and developed markets. For example, the fund made by large financial institutions, private family offices and development organisations made an investment of $4 million to a provider of affordable homes that are designed for low income families in rural areas. Over 10,000 homes have been constructed in three South American countries, focusing particularly in areas affected by natural disaster. Another example would be the Calvert Foundation’s Women Investing in Women Initiative which let individual investors to make loans to women in developing markets to access clean energy.

The Key word “impact investing” was coined in 2007.The basic objective of impact investing is to help to reduce the negative effects of business activities and to provide new solutions to social and environmental problems.

Impact investing aims to:

  • Raise access to financial services
  • Maintain agriculture
  • Improve education
  • Make housing affordable
  • Support clean energy technologies
  • Boost job opportunities
  • Helps to reduce crime
  • Curb homelessness

Impact investors have taken the concept of SRI one step ahead. Instead of avoiding companies whose products and services are unrelated with their values, impact investors look for and invest in those companies, securities, and funds that are in fact helping to fight for societal issues of homelessness, hunger, disease, and environmental degradation.

Where are Impact investments being made?

Impact Investments are made all over the world. Impact investor’s scope is from private foundations like Gates, Kellogg, many more, to private banks like Deutsche Bank, Morgan Stanley, JP Morgan, to development and government agencies like DFID, OPIC, USAID and the SBA, to privately held funds and individuals around the world.

Why Impact investing?

It is an investment strategy that hardens the notion that financial return and environmental or social impact need not be equally exclusive. In some other words, Impact investing proves it is possible to “do well” and “make money” at the same time.

Few reasons why Impact Investing can be beneficial:

1) Impact investing, or investing with the intension to create  impact alongside financial return, frequently leads to higher performance for a longer time as compared to other investment strategies.

2) Impact investment provides diversity of opportunities. Impact investments now span across all asset classes and geographies, of social and environmental causes, allowing for truly unique investment opportunities. There is overabundance of ways to allocate capital in the Impact investing landscape that includes U.S. equities, private debt, private equity, green bonds, municipal fixed income, green hedge funds, and the list continue.

3) Impact investors usually stick to larger transparency regarding portfolio decisions. Greater transparency allows asset managers to make the necessary adjustments to maximize both impact and return. Furthermore, greater transparency facilitate investors and clients to have a greater understanding of what exactly is happening in their investment portfolios, and why. Consequently, companies are stressed to stick to greater transparency because Impact investors are more and more demanding this as part of their due diligence on a company’s commitment to environmental and social standards. Various tools such as the GRI, the Global Impact Investing Rating System (GIIRS) and the United Nations Principles for Responsible Investment are helping further the increase in transparency as such tools are encouraging companies to engage in public reporting about their environmental and social initiatives.

4) By an Impact investing strategy, the non-financial risks inbuilt in an investment are given extra thought as such non-financial risks become essential to viewing a company through an environmental, governance and social lens. Through impact investing broadens the scale of measured risks and thus helps to lower investment volatility.

5) Impact investing also fosters entrepreneurship, as intelligent, passionate entrepreneurs are not only successfully making money, but also attaining confidence in their ability to fundraise for impactful ideas.

How Does the Impact Investing Work?

Impact investing need investors to consider a company’ promise to corporate social responsibility or the sense of responsibility to surely serve society as a whole, before involving with that company.

Impact investing allows you to invest with the double goals of getting a return and making a positive impact on the globe, whether it’s social or environmental or monetary. This Impact Investing trend is still in its early stages and the growth is very high in future.

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