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Impact investing has emerged as a powerful and moving force in the global business landscape. It has provided investors with a unique opportunity to align their financial goals with values that drive positive social and environmental outcomes.

In this blog, we explore the concept of impact investing, its potential for financial returns, and how entrepreneurs can leverage this approach to create meaningful and sustainable impact.

What is Impact Investing?

Simply defined, Impact investing is an approach that aims to generate financial returns through positive social or environmental outcomes. It involves investing in companies, funds, or projects committed to creating positive change in areas such as poverty, environmental sustainability, and social justice, to name a few.

Let’s take an example of an opportunity to invest in a company that produces factory-made standard clothing versus investing in a startup that streamlines and organizes clothing made by village artisans in a quest to preserve their culture. 

The first venture would be a pretty simple business decision, whereas investing in the latter would mean taking into account the impact and outcome on the immediate society of working with a marginalized (or) economically challenged community of artisans. So, the goal isn’t just potential profit, it is positive change or impact plus potential profit.

Tying Financial Returns with Social and Environmental Impact

Impact investing as an approach has gained significant traction in recent years, with impact investing steadily becoming a recognized and legitimate investment practice. As of 2021, over 3,349 organizations are managing an estimated $1.164 trillion in impact investing assets under management (AUM) worldwide.

This number is still off from the $4.2 trillion that the United Nations estimated would be required to achieve its 17 Sustainable Development Goals by 2030 and attain Net Zero by 2050. However, the positive sign is that investment in impact projects is growing at a net CAGR of 18% year on year – the biggest jump coming from $502 billion in 2019 to $715 billion in 2020 – a 42.4% jump.

This growth is driven by a variety of factors, including increased awareness of environmental and social issues, a desire among investors to contribute to positive change, and the emergence of specialized financial products and metrics for measuring impact.

A healthy sample size of investors tracked by the Global Impact Investing Network indicated that the types of investors in the area of impact investing consisted of:

Measuring and Reporting for Effective and Efficient Impact Investing

One of the key challenges in impact investing is effectively measuring and reporting the impact of investments. To address this issue, a variety of impact measurement frameworks and tools have been developed, such as the Impact Management Project (IMP), the United Nations Principles for Responsible Investment (UNPRI), and the Sustainable Development Goals (SDGs). These frameworks provide investors with a common language and set of metrics to assess the social and environmental impact of their investments.

Leading the way in innovative ways to measure and report on impact investing are Root Capital, the MacArthur Foundation, the Omidyar Network, Bridges Impact+, the World Economic Forum, and the Rockefeller Foundation. This work has produced several interesting metrics, including social return on investment (SROI).

In addition to these frameworks, impact investors are increasingly seeking to align their investments with the SDGs, which provide a comprehensive roadmap for addressing global challenges such as poverty, hunger, health, education, and climate change. By aligning their investments with the SDGs, investors can contribute to a more sustainable and equitable future while generating competitive financial returns.

Take, for example, the Rise Fund. Started in 2016 with over $18 billion in assets under management (AUM), Rise has worked with Bridgespan – a global consulting firm for philanthropy and non-profits – to create the Metric Impact Multiple of Money (IMM). The IMM involves six steps to calculating the impact value of a project or investment:

  1. Assessment of the Relevance and Scale
  2. Identify Target Social or Environmental Outcomes
  3. Estimate the Economic Value of those outcomes to Society
  4. Adjust for Risks
  5. Estimate Terminal Value
  6. Calculate Social Return

Investors that Focus on Impact Investing

Impact investing has enabled the growth of numerous startups and innovative companies that are driving positive social and environmental change. There are the usual suspects, such as Tesla, which aims to harness renewable energy to power technology in the future, or Google, which has been carbon neutral since 2007 and aims to be run on 100% renewable energy by 2030. There is Apple has committed over $200 million in investments under their Racial Equity and Justice Initiatives, while Amazon has launched the Climate Pledge Fund, setting aside $2 billion for investments in the space of climate change.

There are also many investment companies that are leading the way in impact investing. LeapFrog Investments, recognized as a global leader in impact investing by ImpactAssets 50 for the 12th year running, has played a significant role in the evolution of the impact investing industry. With over $1 billion in AUM and 30+ years in the business of impact investing, LeapFrog’s goal is “to open the gates of capital markets to purpose-driven businesses that provide emerging consumers with the tools to lift themselves out of poverty.

Learn Capital, another VC focused on the goal to “back and build rapidly scaling tech-enabled companies that tackle the world’s biggest human-centred problems and help us all reach our full potential,” also has over $1 billion AUM. With a primary focus on education – the investments in this sector account for nearly 40% of Learn’s portfolio of 176 companies – the VC firm also focuses on the areas of finance, community, gaming and health.

Then there is the Founders Pledge, which, in 2023, achieved $502 million in new pledges, $186 million donated to the charitable sector, and a record $84 million to their high-impact recommendations. It boasts of members such as Micheal Acton Smith, founder of Calm, and Kathryn Minshew, Founder & CEO of Daily Muse Inc. Founders Pledge aims to harness the collective power of a community of high agency individuals consisting of C-suite level executives and founders, with a desire to steer the world towards an environmentally and socially positive future.

So, if you’re a startup seeking investors who prioritize both purpose and profit, now appears to be an opportune time.

Trends and Opportunities – The Future of Impact Investing

As we look into the future of impact investing, the trends and opportunities are vast, reflecting the ever-evolving landscape of global finance and the growing emphasis on sustainable and socially responsible investment strategies. Here are some key trends and opportunities in impact to keep an eye on:

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