Investors tend to think about for-profit investments and philanthropic capital in two separate buckets. Impact investors, however, seek to prove that they can both achieve competitive financial returns and create positive social or environmental impacts with one strategy—impact investing.

Governmental bodies and specialist investment managers have years of experience executing impact investment strategies. However, the ecosystem is still nascent overall. As interest in impact investing continues to tick upward and opportunities and challenges emerge, it’s worth taking a closer look.

If you’re interested in learning more about the impact investing landscape, this FAQ is for you. For additional context, check out our impact investing glossary.

Impact investing FAQ

Q: What is impact investing?

A: The term “impact investing” was coined in 2008, but socially responsible investing goes back thousands of years. Impact investing today is a strategy that targets investment opportunities intended to create both financial returns and positive social and/or environmental impact. Investors who seek both financial gains and meaningful impact refer to this as the “double bottom line.”

Q: What is “impact”?

A: “Impact” means different things to different people and can vary significantly across business sectors, investment strategies, and geographical regions. Investors tend to agree that “impact” refers to the social and/or environmental externalities that result from an investment, and impact is informed in large part by the context of the stakeholders, enterprises, and the populations served by an investment.

For example, an investment in a small business in an emerging market might be deemed impactful because of the resulting job and income creation. The same investment in the US, however, may simply be categorized as a small business loan.

Because of the subjectivity of impact, investors track outcomes with quantitative and qualitative metrics and typically require their portfolio companies to do the same.

Q: Who makes impact investments?

A: Investors across alternative asset investment strategies can make impact investments. This includes PE, VC, debt, infrastructure, commodity and real estate investors. Some investment firms are dedicated to making only impact investments, while others may make generalist investments out of their commercial funds and raise a unique impact fund to appease clients or test the strategy.

Q: Who are the most active limited partners in impact investing?

A: Development finance institutions (DFIs)—which can include investment banks, institutional investors, advisers and managers—are uniquely positioned to commit capital to impact funds. They are among the greatest contributors of impact capital because of their long-term financial positions and social and environmental development goals. In addition to DFIs, the following individuals and groups can and do make impact investments:
  • Foundations
  • High-net-worth individuals (HNWIs)
  • Family offices
  • Pension funds and insurance companies
  • Government institutions

Q: How do investors measure impact?

A: General partners and entrepreneurs may gather data explicitly required by their investors, create their own impact metrics or utilize externally established performance-tracking frameworks. Established impact measurement frameworks include:

Q: What’s the future of impact investing?

A: As impact investing matures, the performance of pioneering impact funds has been crucial for establishing credibility, best practices and paving the way for future managers. The entrance of mainstream investment firms lends additional credibility and attention to the approach, helping attract a larger base of for-profit capital. Although this is a welcome development, PitchBook analysts advise that impact investors take care to ensure these firms are offering products that are truly managing for the double bottom line.

At a base level, impact investing is an innovation on philanthropic capital that investors seeking social or environmental change can utilize to scale their reach of their allocation while still enjoying financial returns. More products are coming to market to meet this need, improving the universe of investable opportunities.

Curious how impact investing is different than socially responsible investing (SRI)? Read our recent blog post. Dive even deeper into impact investing by downloading our recent analyst notes on private market impact investments and sustainable investing.

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