Welcome to the Impact Investing Guide

This website aims to be a hub of information for MBA students and professionals wanting to learn about the impact investing industry and potentially pursue a career change. This page introduces the core aspects of impact investing, and using the menu above you’ll discover more detail organised by industry segment as well as useful resources for those starting out in the field.

What is Impact Investing?

Let’s start with a definition of impact investing from the Global Steering Group for Impact Investment:

“Impact Investment optimises risk, return and impact to benefit people and the planet.
It does so by setting specific social and environmental objectives alongside financial ones, and measuring their achievement.”

This universal definition is useful because can be applied to all investment types and asset classes. To help further clarify that an investment qualifies as an impact investment, IESE Business School’s working paper ‘An Unconventional Perspective on Impact Investing‘ suggests 5 criteria:

1.  Profit as an objective
2.  An intentional, pre-determined social impact
3.  A measurable social impact
4.  A positive correlation between the intended social impact and financial return
5.  A result that produces a net-positive change to society

What is the difference between Impact Investing and ESG?

The proportion of assets managed with ESG considerations has exploded in recent years and it is now hard to find new investment products that don’t reference the term.

The main difference between ESG and impact – is that ESG relates to non-financial factors that can affect an asset or investment, whereas impact relates to how the asset or investment affects the world. This is the reason that Tesla can be dropped from a large ESG index, although electric vehicles are critical to decarbonisation of our transport sector, the company may have poor ESG ratings if the environmental, governance or social credentials of the company itself are poor.

Do impact investments have below market rate returns?

A common misconception is that a conflict exists between impact and financial return, but this is not the case with impact investments since the two must be positively correlated. If they are not, it is likely the business model is either not sustainable or just disguised philanthropy. Visualising a spectrum of impact and financial return helps place where impact investing sits in relation to traditional investing and philanthropy:

Family offices were the sector’s pioneer investors due to being less tied by institutional constraints, able to assume higher investment risk and frequently having values that align with the sector. However impact investments now happen across asset classes in both private and public markets ranging from small, geographically focused impact venture capital firms to huge global public equity funds. Recent financial innovations such as blended finance, outcomes contracts and social impact bonds are helping to accelerate capital deployed to impact investments.

The Global Impact Investing Network’s 2020 Annual Survey estimates there are $404 billion of assets under management as at Dec 2019. This capital is distributed across asset classes as following:

 

It is worth taking a moment to note that environmental, social and governance (ESG) investing and socially responsible investing (SRI) are different terms.

What Exactly Is Impact?

Whilst optimising risk and return is a well understood investment concept, things get more complex when adding impact to the equation. A good place to start understanding impact is the most commonly adopted yardstick for international development – the United Nation’s Sustainable Development Goals. Released in 2015, the 17 goals and their 304 indicators were adopted by world leaders as shared global targets for 2030. The goals represent a common call to action for governments, businesses and individuals; to understand the scale of the challenges ahead it’s well worth scanning UN Resolution A/RES/70/1 titled ‘Transforming our world: the 2030 Agenda for Sustainable Development‘.

The PRI’s Market Map helps by classifying impact into 10 thematic areas:

Energy efficiency  |  Green buildings  |  Renewable energy  |  Sustainable agriculture  |  Water

Sustainable forestry  |  Affordable housing  |  Education  |  Health  |  Inclusive finance

This list is not an industry standard classification, and investments or portfolios often touch multiple or perhaps even all these themes.

Whilst there is not yet an industry standard for measuring and reporting impact, certain tools like the GIIN’s IRIS metrics are more commonly used. You can learn about these and others on the Tools and Frameworks page. The lack of standards has resulted in industry concern of green-washing, classifying an investment as impact when not warranted. Clarification of terminology and classifications is still regularly discussed at industry events, and it’s worth noting that some industry leaders feel standardised metrics are not the best way forward.

Why is Impact Investing Important?

Milton Friedman declared in 1970 that a corporation’s only responsibility was to maximise profit for shareholders. 50 years later we are facing the externalises caused by short-term profit creation: environmental degradation, social inequality and resource scarcity. Ignoring these externalities is no longer an option. Businesses are now realising that long-term profitability requires sustainable business models which create value for all stakeholders. As sustainability concepts thus become embedded in the core of corporate strategy we are seeing the growth of hybrid business models where positive impact is directly correlated with profit – doing well by doing good.

The UN reports a $2.5 trillion funding gap needs to be filled if we are to achieve the SDGs by 2030. As the problems faced by society become more critical and complex, it’s clear that governments and philanthropy can’t solve them on their own. With total global investments estimated at $300 trillion, it would take only a 1% shift to impact investing to cover this finding gap.

Industry Innovations & Blended Finance

New financial instruments have also emerged to respond to the challenges of the sector including:

• Social impact bonds (outcome based contracts with governments that incentivise targeted social outcomes)
• Development impact bonds (outcome based contracts with third-party investors such as donors or foundations)
• Community investment notes (high-impact investment vehicles with a modest rate of return)
• Community bonds (debt instruments offered by non-profits for the purchase of an asset)

These instruments have seen the development results based financing and blended finance. Blended finance is the combination of different capital sources, each with different needs, to encourage capital flows and thus outcomes which couldn’t have happened without the pairing. This blending is typically of sources with different risk appetites, for example public sector development finance with private investment capital. In this example the impact-focused development finance can afford higher risk, yet there is not enough of it to meet development funding requirements. However by assuming first loss, it be used as catalytic capital to reduce the perceived risk of an investment to a level which meets the needs of the private investment capital.

The inclusion of the catalytic finance source may also bring additional benefits, such as the donor organisation’s ability to impose mandates on local public bodies to further reduce risk, something private finance alone wouldn’t be able to achieve. The GIIN has a blended finance working group to establish best practices further develop these financial structures, and an OECD publication demonstrates how it may be used to help achieve the UN’s SDGs. Convergence’s ‘The State of Blended Finance 2018’ is also a good read on the topic.

Working In Impact Investing

The estimated $230 billion of impact investing capital is deployed at organisations around the world thanks to the work of professionals in: accelerators & incubators; social venture capital funds; public equity asset management; wealth management and advisory firms. After learning about these industry segments from the menu above dive deeper with the recommended resources including online courses, tools and frameworks and industry conferences.

If you are pursuing a career change it is also important to review the section on networking to learn recommended techniques for conducting informational interviews. These are critical to learn about the sector in more detail and find the best role for your particular profile. It is also worth taking a look at ImpactAlpha’s ImpactSpace, a directory of over 6500 impact companies to find firms related to your experience and interests.

There’s plenty to digest here and the Guide is intended to be a resource you can return to over time, so bookmark the page and subscribe to be kept updated with major developments.

If you have questions or suggestions of materials to be included in Impact Investing Guide we’d love to hear from you.

Lastly, a big thank you to all the people who made the Guide possible.