Impact Investments An Emerging Asset Class 2010

The report also estimates significant market opportunity for impact investment over the next ten years. Which leads to the broader question, how is impact investing different from the socially-responsible screened public equities that have been around for 30 years, or development finance institution investments that have been around for over a half century? A major criticism of the billions of dollars that are classified as impact investing is that it’s just old capital in new packaging. We need to build impact investing as an approach, not an asset class, by developing communities of practice applying the impact lens to specific asset classes, such as risk capital or public equities. Impact private credit can help a range of different companies and projects across developed and emerging markets. For example, companies providing low-carbon services to different industries, or infrastructure projects in underprivileged communities.

Social impact investing is now high on the agenda for some of the world’s most powerful countries – and its transformational potential in developing markets is also becoming increasingly apparent. Respondents that allocate a portion of their impact AUM to both developed and emerging markets. “The seeds for impact investing were sown in the last quarter of the twentieth century with the socially responsible investment and corporate responsibility movements” (p. 32) (Bugg-Levine and Goldstein 2009). The upcoming 26th UN Climate Change Conference of the Parties (COP26), focused on improving the global market for carbon credit, will help monetize the environmental impact of carbon sequestration.

But borrowers can also include companies seeking to raise credit for the first time to fund specific impact-related goals. That might be because they’re an early-stage business looking for growth capital or because banks and other traditional finance providers generally stick to lending to companies focused on more traditional business segments. To assist in determining inclusion and exclusion, we followed guidelines provided by Cooper (1998), which provided guidance on both the number of studies to include and the composition of works to be included. Although Cooper’s work provided no specific answers (p. 73), it did validate our use of multiple channels, the inclusion of peer-reviewed and other published work, and the ratio of formal and secondary sources included in the study.

  1. Another contributing factor is likely to be the topic’s comparative novelty in mainstream research.
  2. An example of this might be working with company management to develop specific impact key performance indicators (KPIs) and targets, like the number of individuals upskilled or carbon emissions reduced by the company’s customers (see Exhibit 2).
  3. And while ESG has gained most traction as a framework for change among listed companies, impact investing has the potential for a wider reach – to businesses outside public markets.
  4. As the impact investing industry continues to evolve and mature, investors are increasingly allocating assets to impact and exploring approaches to manage their portfolios toward greater impact.

An organization or professional that oversees the management and value of an asset or portfolio of assets, including diversified financial institutions and investment managers. The most difficult aspect of this review was the task of screening, determining which articles should be included and excluded. Although our goal was to provide a sample of 50 articles, we found it difficult to cull the contributions beyond the 73 provided in the Appendix without sacrificing some important perspectives on the topic. Table 2 presents the distribution of the articles included in our sample according to date of publication. We began our search by casting a very wide net through Google and Google Scholar to gain perspective on the breadth and scope of knowledge in the topic of II, and subsequently narrowed its focus to scholarly literature via ProQuest. As expected, we found a very small number of peer-reviewed publications on the topic, consistent with similar emerging, practitioner-led initiatives such as microfinance (Brau and Woller 2004).

Lenders can take a similar approach when providing funding for environmental or social issues. This means incorporating impact reporting requirements and impact covenants into credit documents to safeguard the use of funding and to incentivise the acceleration of impact generation. An example of this might be working with company management to develop specific impact key performance indicators (KPIs) and targets, like the number of individuals upskilled or carbon emissions reduced by the company’s customers (see Exhibit 2).

The notable evolution of Hollard’s equity fund

Unfortunately, the asset class categorization hurts enterprises, and it is important to differentiate risk capital from impact investing moving forward. Impact investing has gained focus in recent times driven by increasing attention to sustainability factors in the world at large. The role of investors in the impact ecosystem is being viewed beyond simply allocating capital, as many investors are now interested in assessing the impact and sustainability outcomes of their investments with intentionality. While the primary objective for an investment fund is to generate a financial return and minimise risk for its beneficiaries, the defining feature of impact investing is to pursue additional, or even distinct, sustainability impact goals. In view of these dual objectives, there is merit in the proposition of impact investing as a separate asset class as it would encourage different investors to increase their asset allocation to social and environmental impact goals. While certain recent regulatory amendments were introduced to target increasing the flow of impact capital, further legal intervention is needed from time to time to keep up with the momentum of the impact sector.

It has almost 3,000 employees, with 80 percent from under-served regions in India, Bhutan, Europe, and the United States. Over half of the employees are women, who in some nations often have limited access to jobs outside the home due to cultural factors. We hope this report helps to advance a broader understanding of impact investing as an appropriate and economically effective way to complement government and philanthropy in solving the world’s greatest problems at scale. We hope this report helps to advance a broader understanding of impact investing as an appropriate and economically effective way to complement government and philanthropy in solving the world’s greatest problems at scale. Unlike traditional bank lending, investors have a broader responsibility beyond their financial contribution. They must actively engage with the borrower to help ensure impact is being generated on their environmental and social goals.

Impact Investing Is an Approach, Not an Asset Class

The steps build on those taken by the Task Force on Climate-related Financial Disclosures (TCFD) to establish global climate-related reporting standards. These pressing and varied global issues have highlighted various problems, from food and water security to inequality and healthcare and education access. And more investors want to use their capital to address these and many other societal and environmental challenges. Respondents that allocate ≥ 75% of their impact assets under management (AUM) to developed markets.

GIIN Membership

The broad spectrum of resources used to compile this paper provides a variety of perspectives and serves as an indicator of the breadth of interest in the topic of II. To bridge the gap between the knowledge bases of practitioners, academics, and government sources, we begin with a summative background of social venture finance, defining and describing many of key terms. A methods section follows, where we describe how we went about our search and coded the works included in our study. We conclude with a synthesis of the works, some unanswered questions and gaps in the literature that may justify further exploration, and recommendations for broader application of the findings. As standards, transparency, and external assurance spread and strengthen, we also anticipate increased efficiency in impact management.

The gap between interest and information was apparent in a survey of 4,000 Americans with annual household incomes above $80,000 conducted by Hope Consulting (Chhabra 2014). The survey revealed that 48% of the sample said that they were interested in II products, but only 12% had any experience with them (ibid.). As impact measurements become increasingly refined and more accepted in practice, the opportunity for scholars to rigorously test aspects of the validity and reliability of metrics becomes more viable. The value of cross-country comparisons and longitudinal studies that compare and track results becomes increasingly important, as a tool for increasing investor confidence.

Impact Investments: An Emerging Asset Class

We considered 57 of the 73 included articles as ones that contained information relevant to audiences throughout the world. Transparency and accountability | The combination of improved standards and increased scrutiny is leading to a new era of accountability for investors laying claim to the impact label. Frameworks and tools such as IRIS+, the SDGs, and the Impact Management Project (IMP) have helped build a global consensus on how to classify, characterize, and measure impact. However, impact measurement remains fragmented, and efforts are underway to align leading sustainability and integrated reporting organizations, alongside ongoing initiatives to harmonize global sustainability reporting standards.

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KPIs in alignment with Global Impact Investing Network’s IRIS+ system, the widely accepted system for managing, measuring and optimising impact. Depending on the context, underserved clients may include low-income demographics, minority populations impact investments an emerging asset class with specific needs that are underserved, or other groups. Impact management framework leverages on the Operating Principles for Impact Management, a framework to ensure that impact considerations are integrated within investments.

At the time, this prediction seemed like a very ambitious forecast to us as authors of the paper and to the people who read it. As more investors look to invest beyond the bottom line, impact private credit is likely to emerge as an increasingly integral tool to effecting positive environmental and social change. Both prioritise providing funding to companies or projects focused on bringing measurable environmental or social benefits, as well as financial gains. With appropriate reward, impact private credit can finance initiatives traditional bank providers either overlook or decline. It’s true that some companies become impact investments by accident, particularly producers of energy-saving equipment and other manufacturers.

Continue reading to learn about the core characteristics of impact investing, who is making impact investments, the results these investments can achieve, and more. A version of this primer, answering many of the most frequently asked questions about impact investing, is available for download as well. Equally, private credit has also emerged from a niche partly focused on distressed debt to a more mainstream product after the global financial crisis that is today used for financing everything from agriculture to renewable energy. Private debt, as defined by the Global Impact Investing Network, involves placing bonds or loans with a select group of investors, rather than being syndicated broadly. Impact private credit combines both trends in a financing tool that is not publicly tradeable. For example, development finance institutions, family offices, foundations, endowments, insurance companies, pension funds and sovereign wealth funds.

A plethora of investments is emerging across multiple asset classes that provide investors with market-rate investments, or for more altruistic investors, substantial social impact, while still generating positive financial returns. The old binary system – the widely-held belief that for-profit investment could only maximize financial return while social purpose could only be pursued through charity – is breaking down. Although pale by comparison to the exponential rise in popular interest, social entrepreneurship has been a topic of academic inquiry for more than 20 years, although little has reached the mainstream publications (Short, Moss, and Lumpkin 2009). Less than a decade ago, social entrepreneurship was considered a “new phenomenon” and “in startup mode” (p. 2) (Mair, Robinson, and Hockerts 2006). Microfinance, considered by many to be the archetype, was not yet part of the mainstream entrepreneurial finance literature, and scholarly interest in the topic lagged well behind that of practitioners (Brau and Woller 2004).