What is Social Impact Investing?

When it comes to investing, you have many options. One that doesn’t get a lot of fanfare is social impact investing, also called impact investing. While this type of investing produces financial returns, the objective is to create measurable social good for people, society or the environment.

The social impact investing market is growing, addressing sectors such as:

Renewable energy
Conservation
Sustainable agriculture
Micro-finance
Accessible and affordable essential services such as healthcare, housing, and education

In 2019, the Global Impact Investing Network (GIIN), a champion in the industry, developed four core characteristics of impact investing.

“The Core Characteristics of Impact Investing define the baseline expectations of what it means to practice impact investing,” explains GIIN. “…Core Characteristics serve as a reference point for investors to identify practical actions they can take to scale their practice with integrity.”

These four characteristics help define credible social impact investing:

Intentionality. An investor’s intention to have a positive social or environmental impact through investments is essential to social impact investing.
Investment with Return Expectations. Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.
Range of Return Expectations and AssetClasses. Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.
Impact Measurement. A hallmark of social impact investing is the investor’s commitment to measuring and reporting the social and environmental performance and progress of underlying investments. This ensures transparency and accountability while informing the practice of social impact investing and building the field.

The most common motivator for investing has historically focused on one goal: achieving financial returns. Impact investing challenges the notion that donations only fund and address social and environmental issues.

Because the impact investing market is growing, there are more opportunities for investors to invest in social and environmental solutions while also producing financial returns.

A few of the most common investor motivations, according to GIIN, include:

Banks, pension funds, financial advisors, and wealth managers can provide client investment opportunities to individuals and institutions interested in general or specific social and/or environmental causes.
Institutional and family foundations can leverage significantly greater assets to advance their core social and/or environmental goals while maintaining or growing their endowment.
Government investors and development finance institutions can provide proof of financial viability for private-sector investors while targeting specific social and environmental goals.

A diverse range of individuals and organizations participate in impact investing projects.

Fund Managers
Development finance institutions
Diversified financial institutions/banks
Private foundations
Pension funds and insurance companies
Family Offices
Individual investors
NGOs
Religious institutions

As you can see, impact investing can benefit a number of different people and groups, both socially and financially.

According to GIIN’s 2020 Annual Impact Investor Survey, impact investors have differing return expectations. Most pursue competitive, market-rate returns. However, some may intentionally invest to get below-market returns based on their strategy and specific objectives.

Infographic Highlighting - Do Impact Investments Perform Financially

The Impact Investor Survey results show a breakdown of targeted financial returns, in other words, the rate of return the investment is seeking. 67 percent go for a risk-adjusted, market-rate return, 18 percent below market but closer to market rate, and 15 percent below market and closer to capital preservation.

The survey participants reported that their portfolio’s performance met or exceeded expectations, both socially, environmentally, and financially. This was true across new markets, developed markets, and the market as a whole.

To see a comprehensive report on the financial returns of impact investments, check out GIIN’s report, Understanding Impact Performance of Investments. The report looks at the financial performance of three asset classes: private equity, private debt, and real assets.

As mentioned above, there is a wide offering of impact investments that produce positive social and/or environmental impacts and financial returns. Here are three examples of impact investing:

Gray Ghost was established to produce capital for technologies that serve underserved populations. Beam is an Indian mobile payment company that allows people to make electronic payments without a bank account.

Targeted Impact: Increase access to financial transaction services for the unbanked.

2- Investor: Calvert Foundation. Investee: Craft3

The Calvert Foundation’s goal is to invest more capital into disadvantaged communities. Craft3 is a nonprofit, non-bank community development financial institution hoping to build economic, ecological, and family resilience throughout the Pacific Northwest of the United States.

Target Impact: Increase economic opportunity in disadvantaged communities.

3- Investor: FMO. Investee: Clean Energy

FMO is a Dutch development bank investing to improve lives and livelihoods worldwide, including food, water, and energy. Clean Energy, or CE, is a “special purpose vehicle” exclusively to fund the construction of Mongolia’s first wind farm.

Target Impact: Increase renewable energy use and access in emerging markets in Asia.

To explore more impact investment profiles across different sectors, visit the GIIN here.

How Big is the Impact Investing Market?

“The amount and diversity of capital for impact investing has increased dramatically in the past ten years, with the current impact investing market estimated to be $715 billion,” according to GIIN’s report.

Because impact investing is still a relatively new term, more money is still needed to advance social and environmental solutions throughout the world.

Between 60 million to 80 million people in India have benefitted from impact investments. To put that into perspective, that’s equivalent to the entire population of France. With the number of social impact institutions and investors rapidly growing, we will also see their impact on large populations and at-risk people among smaller populations.

Millennials are changing the way people invest. As they gain more equity in various markets, a study showed that 91 percent of millennials would switch brands to ones associated with a cause. As such, we should expect to see a huge trend toward impact investing based on millennials’ social and environmental values.

How RealWealth Makes an Impact

Making an impact is a core value at RealWealth. That’s why we donate 10 percent of all profits earned through real estate transactions to the RealWealth Foundation. If you want to be a part of a real estate investing community that believes in doing good and giving back, join RealWealth today. Membership is 100% free and gives you access to real estate investing education, resources, and vetted turnkey property teams so you can easily build your real estate portfolio.