An Introduction to Impact Investing
by James Puddicombe
Impact investing is a new way both private and public investors can make money while doing good for society. It represents investment in organizations or funds that aim to provide a financial return, as well as a clear intention to provide measurable social returns.
When a typical grant is provided, it is done so knowing that you will not make a financial return on your investment, but will generate a social benefit. In contrast, impact investing specifically seeks a financial and measurable social return. The nature of impact investing creates a bridge between the private, public, and social sector as it seeks to find innovative ways in which private capital can be leveraged to tackle escalating social issues.
There are three overarching components to impact investing: the supplier of capital (the impact investors), the organizations that are demanding investment, and the organization or product that facilitates this relationship (otherwise known as the intermediary).
Impact Investing Is a Strategy
Some impact investors are looking to receive market rate financial returns, while concurrently capitalizing initiatives that advance their social intentions. Impact investing is a strategy, and not a separate asset class (examples of asset classes are stocks, bonds, and real estate). This is a critical distinction to understand, as the impact investor is still using traditional asset classes that have decades of proven data on financial returns, just with a different strategy towards investment.
The difference is that impact investment seeks to also measure a return on the social value added that has stemmed from your investment. To help conceptualize this, consider the example of the Social Enterprise Fund (SEF), an Edmonton-based collaborative developed by the Edmonton Community Foundation, the United Way of the Alberta Capital Region, and the City of Edmonton.
This initiative provides loans to Alberta-based social enterprises that have had difficulty obtaining financing from traditional institutions, mainly due to the small size and uncommon structure of their business. The value added for the fund is in the organizations that they lend to and their ability to demonstrate a social return on investment. By setting out clear, measureable social outcomes before investment, impact investors are able to track social return by observing these outcomes at the end of the investment cycle.
One of the leaders in this space in Canada is the Community Foundation of Ottawa. They now have 8% of their $110 million endowment allocated to impact investing, focusing on loans to charities, affordable housing development, and social enterprises.
Brian Toller, who led the foundation's move into this type of strategy when he was board chair, says, “Impact investing makes sense for a foundation like ours with a social mission. It better aligns our assets with our purpose, while at the same time opens the door for charities to use new financial tools to help them have greater impact."
Growth in Impact Investing Fueled By Private Investors
To date, most impact investment has come from private investors – foundations, family offices, and high-net worth individuals. Their capital has certainly led the charge on the development of the impact investment philosophy, contributing to a number of affordable housing initiatives, equity and loan financing for small to medium-sized social enterprises, and the ever-expanding field of micro-finance.
As we witness the field of impact investment grow from the margins to the mainstream, there are a number of institutional investors joining the conversation, including pension plans, banks, and insurance companies. There has also been substantial institutional movement in the space of impact investment, a very exciting trend. A good example is the development of functional health care infrastructure in Africa.
As charitable organizations look for different ways to diversify their funding, impact investment holds significant relevance. These investments offer an alternative to grants and add to the financial capacity and sustainability of the charitable sector. As more private and public investors become aware of the benefits that impact investing has to offer, it will be equally important that the demand side organizations (including charities) recognize the advantages that come with this new approach, as it provides an excellent way for organizations to diversify their revenue base and contribute to the continued sustainability of the charitable sector.
Impact investing offers new opportunities for the sector as a whole, and we should look forward to seeing its growth and development in the years to come.