Impact investing has experienced exponential growth due to rising investor demand. Both institutional investors and high-net-worth individuals are joining this trend of impact investing.
Through your donor-advised fund, you can take part in impact investments like program-related investments (PRIs) and nonprofit loan funds.
What is Impact Investing?
Investors who focus on impact investing can choose to consider both its positive social or environmental impact as well as financial returns when selecting investments, while still reaping financial returns. This approach may involve employing various asset classes and investment strategies – even those unrelated to investing; impact investing may also be referred to as mission-related investing, socially conscious investing or program related investments (PRIs).
Impact investing requires two key components: intention and measurement. A company may create positive social or environmental impacts without meeting the definition of impact investing, but an impact investor proactively pursues investments which they expect will produce measured, positive impacts alongside financial returns.
Individual investors now have more ways than ever before to engage in impact investing. Fidelity Charitable’s Private Donor Group allows donors to use their fund for making permanent impact-investing recurrent income (PRIs) that invest in impact-oriented private equity and venture capital funds, or lending microfinance companies or investing in socially conscious or environmentally focused mutual funds.
How does Impact Investing work?
Investment strategies that seek both profit and social impact are an emerging strategy among many investors. Although the business world provides tools for estimating an investment’s potential financial returns, social and environmental returns may be more difficult to evaluate when compared with market rate gains.
Impact investing strategies often entail using returns from investments to further their impact, while at the same time supporting organizations or funds which become self-sufficient so less philanthropy needs to be directed toward funding them directly.
Individuals can make impact investments using various vehicles and investment platforms, including impact-oriented private equity funds and venture capital funds, microfinance impact funds, sweat equity returns and microfinance impact funds. Some impact investments provide unique social returns which cannot be measured using traditional investment tools like the internal rate of return; sometimes called sweat equity returns and often measured based on lives saved.
What are the benefits of Impact Investing?
Impact investing provides a unique opportunity to mitigate some of the negative social and environmental consequences associated with traditional business activities while simultaneously producing market-rate financial returns. For instance, investments in renewable energy could reduce our reliance on fossil fuels; microfinance loans help women entrepreneurs in emerging markets start businesses and grow their incomes.
Numerous investors utilize impact investing strategies to better align their portfolios with their values and goals. Socially conscious financial service companies and web-based investment platforms enable individuals to participate in impact investing through various vehicles.
Additionally, many private foundations are turning their endowment assets towards impact investing as a means to fulfill their philanthropic objectives. Rise utilizes research-driven metrics for impact analysis and investment decisions; for instance, its calculation of EverFi’s risk-adjusted product reach depends on such research which measures how many people benefit from an individual program.
What are the challenges of Impact Investing?
Impact investing remains challenging despite its growing momentum, as its challenges can include difficulty in generating competitive financial returns; measuring social and environmental impacts at scale; connecting investors interested in impact investments with companies pursuing them; as well as connecting potential impact investors with those that pursue such investments.
Establishing an effective market for impact investments requires creating a new investment paradigm, one which considers both financial return and social outcomes equally. While this task may seem ambitious, it could create immense economic value both for individual investors and society as a whole.
Investors must also be willing to accept more risk in order to support companies tackling social problems. Finally, impact investors must collaborate together on sharing best practices and setting new transparency and disclosure standards – this will ensure the impact investing industry reaches its full potential and continues to thrive.
