In this blog, we will explore an asset class or investment option that not everyone may be familiar with. With this option, you can not only earn returns on your investment but also gain mental peace by making a positive impact on society or the environment.
Let's find out what Impact Investing is that can satisfy your internal values along with your financial returns. Furthermore, we will also learn how it begins and how it distinguishes itself from other investment options.
Note: This blog has been written by conducting online research and studying various websites and surveys. You can find its link by checking the references section at the end of this blog.
What Is Impact Investing?
Impact Investing is like putting your money to work not just for financial returns but also to create positive social or environmental impact. It's a unique investment approach that generates financial profits and contributes to the betterment of society or the planet.
Impact Investing is a conscious effort to use your investment as a force for good. It's an approach that aligns your financial goals with your values, allowing you to make a positive impact on the world while seeking returns on your investments. It's an increasingly popular choice for those who want their money to do more than just grow – they want it to make a positive difference.
But if you are thinking that this type of investing is only for serving society and not for investors seeking returns, then you are wrong. One of the 2020’s GIIN Annual Impact Investor Survey found that approximately 80-85% of respondents report meeting or exceeding their financial expectations with Impact Investing.
When Did "Impact Investing" First Appear?
Impact investing as a formal concept and term began to gain recognition in the early 2000s, but the roots of socially responsible and ethical investing can be traced back much further.
Timeline Of The Development Of Impact Investing:
Early Socially Responsible Investing (SRI):
The origins of socially responsible investing can be traced back to the 18th and 19th centuries when certain religious groups and individuals abstained from investing in industries such as alcohol, tobacco, and firearms. However, it wasn't until the mid-20th century that the modern SRI movement began to take shape.
1960s-1970s:
During this period, SRI gained momentum in response to social and environmental issues like the civil rights movement, the Vietnam War, and growing environmental concerns. Investment funds and organizations dedicated to ethical and socially responsible investing began to emerge.
1980s-1990s:
The 1980s saw the development of more formal SRI investment strategies and the establishment of socially responsible investment indices, due to disasters such as Chernobyl and the founding of the US Sustainable Investment Forum (US SIF). Institutional investors and pension funds started to incorporate SRI criteria into their investment decisions.
2000s:
The term "impact investing" started gaining prominence in the early 2000s, with the Rockefeller Foundation significantly promoting the concept. In 2007, the term was coined at a meeting convened by the Rockefeller Foundation, and the foundation began to champion the idea of investing for both financial returns and social impact.
Global Recognition:
Impact investing gained global recognition with the establishment of organizations like the Global Impact Investing Network (GIIN) in 2009. GIIN's mission is to increase the scale and effectiveness of impact investing worldwide.
Mainstream Adoption:
Impact investing continued to grow in the 2010s, with a growing number of financial institutions, asset managers, and foundations incorporating impact strategies into their investment portfolios. Various impact investment funds, social impact bonds, and impact measurement tools emerged during this period.
What Are The Key Characteristics Of Impact Investing?
1. Dual Bottom Line:
The Dual Bottom Line is a unique characteristic of Impact Investing that sets it apart from traditional investing. It represents the idea that impact investors aim to achieve not just one, but two important outcomes with their investments: financial returns and positive social or environmental impact.
It's a unique feature that differentiates impact investing from traditional investing and reflects the intentional commitment to making the world a better place through financial resources.
2. Intentionality:
Unlike traditional investing, which primarily seeks financial gains, impact investing prioritizes intentional positive outcomes alongside financial gains.
3. Diverse Sectors:
Impact investments can span various sectors, from renewable energy and clean technology to healthcare, education, and affordable housing.
4. Diverse Asset Classes:
Impact investing can encompass a wide range of asset classes, including private equity, venture capital, fixed income, and public equity. It is not limited to any particular investment type.
5. Risk and Return Expectations:
Just like traditional investments, impact investments carry financial risks, and investors have varying return expectations. Some may be willing to accept lower financial returns in exchange for a higher social or environmental impact, while others may expect competitive market returns.
According to a study by the International Finance Corp., Private-equity impact investments can outperform the S&P 500 index by 15%.
However, a University of California study found that the median impact fund had a lower internal rate of return (IRR) of 6.4% compared to 7.4% for the median "impact-agnostic" fund.
6. Market-driven:
Impact investing operates within the framework of market-driven capitalism. It aims to use market forces and business principles to drive social and environmental change.
7. Impact Measurement and Reporting:
Transparency and accountability are crucial in impact investing. Investors often require companies or projects to report on their progress toward achieving social or environmental goals.
Final Words
I hope after reading this blog, most of your doubts about Impact Investing will be clarified, and you may have learned something new as well. So, if you aspire to contribute to society and make the world a better place, this could be a simple and excellent option for you.
But note that, like any other investment option, this also has its own pros and cons, which we will discuss in another blog. Therefore, always conduct thorough research and invest in any scheme or asset wisely; this is my final tip.
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