Investors around the globe are making impact investments with the hope of making the world a better place. Understanding that returns may come in at a rate below market value, investors use capital to address challenges in various sectors, such as sustainable agriculture, affordable housing, and health care.
Impact investing combines financial returns with positive social and environmental impact. It’s becoming more popular due to the potential to drive meaningful change by supporting nonprofits and achieving environmental benefits. For many organizations, the opportunity to further human rights causes is more important than strengthening their bottom line or increasing their financial performance.
In this article, we’ll break down various types of investments within the impact investing market and provide several examples of organizations harnessing the power of mission-related investing to drive meaningful change.
What is impact investing?
Impact investing is a distinct approach to investment that aims to generate positive social and environmental impact alongside financial returns.
Unlike traditional investing — which primarily focuses on maximizing financial gains — impact investing intentionally seeks measurable and beneficial outcomes in specific areas. It combines the principles of finance and philanthropy, aligning financial goals with the values of making a positive difference in the world.
Various organizations provide education for fund managers and institutional investors interested in getting involved with impact investing. The Global Impact Investing Network (GIIN) in the United States promotes various best practices, and the Principles for Responsible Investment (PRI) drive the United Nations’ approach to impact investing and its framework for responsible investing.
The importance of impact investing
Our world faces numerous social and environmental challenges — from climate change and resource depletion to poverty, inequality, and inadequate access to health care and education.
More than just traditional philanthropy and government aid is needed to address these complex issues. Impact investing has emerged as a crucial tool to complement these efforts and drive positive change at scale.
A few ways that impact investing plays a significant role in addressing social and environmental challenges include:
- Mobilizing capital. Impact investing channels private investment capital toward socially and environmentally beneficial projects and enterprises. By leveraging investment capital, impact investors contribute to financing initiatives that address key challenges, such as renewable energy infrastructure, sustainable agriculture, affordable housing, and health care innovations.
- Scaling innovative solutions. Impact investing provides funding and support to innovative solutions developed by entrepreneurs and social enterprises.
- Creating positive externalities. Companies can generate social, environmental, and economic benefits for communities and regions through impact investing. For example, investing in renewable energy projects can reduce greenhouse gas emissions, create local jobs, and improve energy access for underserved populations.
- Influencing corporate practices. Impact investors can actively engage with companies in their investment portfolios — advocating for responsible business practices, environmental sustainability, and social responsibility.
- Addressing market gaps. Effective impact investing targets underserved markets and segments that have historically received limited attention from traditional investors and financial institutions.
What are the differences between impact investing vs. sustainable investing vs. socially responsible investing?
While impact investing, sustainable investing, and socially responsible investing align investments with positive social and environmental outcomes, they each have distinct approaches and focus areas.
Understanding the differences between these approaches can help investors navigate the landscape of sustainable finance and make informed investment decisions.
Focus
Impact investing specifically targets investments that intentionally generate measurable positive impact. Sustainable investing encompasses a broader range of environmental, social, and governance (ESG) considerations, while socially responsible investing emphasizes ethical and values-based criteria.
Intentionality
Impact investing requires explicit intentionality to create positive social and environmental change. Sustainable and socially responsible investing can involve a range of approaches, from active engagement with companies to negative screening or positive selection.
Measurement
Impact investing emphasizes measuring and reporting the social and environmental outcomes of investments. Sustainable and socially responsible investing may include ESG integration but may not always require direct impact measurement.
In other words, you’ll want to understand how your impact investments are having an effect and producing your desired outcome.
Scope
Impact investing can include various investment types and asset classes, including private equity, venture capital, and debt instruments. Sustainable and socially responsible investing can be applied to multiple investment vehicles, including mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds.
What are some strategies and approaches of impact investing?
Impact investing encompasses various strategies and approaches that investors can use to achieve their social and environmental goals while seeking financial returns. Understanding these strategies can help investors align their investment preferences and priorities with specific areas of impact.
Potential strategies may include:
- Thematic investing. This practice involves focusing on specific areas or themes that align with an investor’s values and desired impact. For instance, investors may invest in renewable energy projects, health care innovations, affordable housing initiatives, or education technology.
- Screened investing. Investors may incorporate specific criteria based on ESG factors to include or exclude specific industries or practices from an investment portfolio.
- Community development investing. This approach focuses on supporting local initiatives and underserved communities. It aims to address economic disparities and social challenges by directing investment capital toward projects and businesses that promote community development, job creation, and access to essential services.
- Blended finance. A blended finance strategy combines philanthropic or grants capital with investment capital to achieve social impact.
3 examples of impact investing
Many companies are embracing the power and potential of impact investing. We cover a few noteworthy examples.
Danone
As a company, Danone’s vision is “One Planet, One Health.” They aim to support people’s health worldwide as they work to build a healthier planet.
To achieve this outcome, they invest funds into multiple social initiatives (including the Danone Ecosystem and their Livelihoods funds). They hope these programs will develop solutions to pressing challenges, such as environmental degradation and access to clean water.
Patagonia
In 2013, Patagonia launched an investment fund worth $20 million to help like-minded entrepreneurs build startups that shared Patagonia’s goal of making great products while protecting the planet. The fund was initially named “$20 Million and Change,” but it was later renamed.
Today, Tin Shed Ventures has provided capital to 12 companies that continue contributing to a better planet. They support companies that make skateboards from recycled fishing nets and create outdoor apparel using safer chemistries. Patagonia emphasizes business that tackles environmental problems while actively supporting companies that share the same goal.
Beyond Meat
Beyond Meat was founded in 2009 to improve human health by providing plant-based alternatives to traditional meat products. In 2018, the company released an impact report outlining how its production was significantly more sustainable and environmentally friendly than conventional beef burger production.
For example, producing a quarter-pound Beyond Beef burger uses 99% less water, 93% less land, and 90% fewer greenhouse gas emissions. These numbers came from a study that Beyond Meat commissioned through the University of Michigan.
In addition, Beyond Meat implemented various eco-friendly measures into their production process to support the environment and lessen their impact. Their Beyond Sausage product uses a compostable tray rather than a plastic tray, and they introduced a water recycling system at their Missouri production facility that cuts water usage down by 80%.
How can you drive meaningful change in the world?
By now, you can better understand what impact investing is and how it can make a difference. No matter what approach you choose to take, you’ll create significant investment opportunities for your company to make a difference in your local community and beyond. It all starts by investing in an impact fund and pursuing sustainable development goals.
IMD Business School can help you learn more about financial services, investing, or executive education. Our executive leadership and general management programs can equip you to impact your organization and build your leadership skills and capabilities.
Find out more about IMD’s Winning Sustainability Strategies Program here!
