Investing and philanthropy have come together in the modern era to reflect the values and desires of today’s Americans. This trend has extended worldwide, with the global impact investing market valued at nearly $500 billion in 2023.

While these figures cannot account for the indirect benefits caused by this type of investing, it’s clear that this trend is here to stay. The most common questions we receive from CEOs and foundations are what this type of investing entails, the benefits of it, and how to create a strategy that maximizes the scope of your impact investments.

Here is everything you need to know about investing for impact.

What is Impact Investing?

Impact or social investing is a strategy focusing on investing funds into companies and projects that dedicate themselves to accomplishing social good. But unlike straight philanthropy, this type of investing aims to generate a financial return in the process.

Most investors focus on impact assets with well-defined environmental, social, and corporate governance, known as ESG. But everyone has different values and goals, so what defines the right investment?

Different morals and ethics drive all CEOs and investors. You may decide to invest based on your religious teachings, or you may have been moved to act by world events. Regardless of what inspires you, impact investments are available in broad fields.

Impact Investment vs. Socially Responsible Investment

Like so many things, impact investments also have their labels. One of the most popular terms is “Socially Responsible Investing (SRI).”

These terms are used synonymously and represent a similar idea— using your dollars to generate a positive impact somewhere in the world. Some of the terms that mean essentially the same thing include:

  • Socially responsible investing
  • Ethical investing
  • Sustainable investing
  • ESG investing

Either way, ESG factors are nearly always the guiding principles that determine whether a particular project or movement suits your needs. You may also use independent ESG scores graded along an ethical curve to decide whether to add an investment to your portfolio.

Why Does Impact Investing Matter?

Impact and philanthropic investments can have various benefits for CEOs and investors that extend beyond doing good.

Obviously, investing in a tree planting project or joining a movement that aims to provide houses to people experiencing homelessness have clear benefits for end recipients. However, other benefits also apply to private companies and investors alike.

Benefits for CEOs/Directors

CEOs and directors are focused on driving growth and ensuring their investments contribute to their organizations. Some of the advantages of making social impact investing a part of your strategy include:

  • Improve Your Reputation – Consumers are increasingly interested in how companies behave. According to the Harvard Business School, 77% of consumers are motivated to buy from companies that are making the world a better place.
  • Connect with Leading Thinkers – This type of investing opens up new opportunities to connect with industry titans. Networking with leading experts unlocks brand-new avenues to drive your firm forward in growth and impact terms.
  • Boost Your Bottom Line – One study indicated that businesses worldwide had generated a collective $4 trillion in revenue from embracing ESG principles in their actions.
  • Attract Investment – Moore Global discovered that 84% of companies embracing ESG principles found it easier to attract external investment.

In short, tangible benefits exist to launching an impact fund and committing yourself to adopt ESG principles at the forefront of your organization’s activities.

Benefits for Investors

Investors also stand to gain. While traditional philanthropy was viewed as an acceptable financial loss to achieve a goal, impact investments can still deliver genuine benefits for an investor’s portfolio, including:

  • Market Rate of Return – Little difference exists between profitable impact and traditional investments. According to the University of California, the median impact fund saw a 6.4% rate of return compared to 7.4% for a non-impact investment fund.
  • Stabilize Your Portfolio – Volatility can make any investor feel nervous. In contrast, Morgan Stanley surveyed over 10,000 funds and found that social impact funds experienced lower volatility than non-impact funds.
  • Diversification – Diversification is critical to future-proofing your investment portfolio. Investing in social good provides a new diversification channel for your efforts.

While market returns and profitability may not be your primary goal, even investors who are passionate about a cause can still enjoy healthy returns on their efforts.

How Does Impact Investing Work?

This form of investing is a relatively new concept, with the term being coined in 2007 thanks to the efforts of the Rockefeller Foundation, which launched the first formal impact investment network.

The difference between impact and traditional investing is how investors or CEOs choose what they wish to invest in. An ordinary investor may only consider the numbers and the growth potential, but an impact investor focuses on a company’s commitment to social responsibility. Even if an investment opportunity is uncovered, these investments will be discounted if they fail to meet ESG principles.

In other words, under the impact investing definition, funds go towards actively seeking to make a difference. Like any investment, some parties are hands-on and actively manage a project, whereas others are hands-off.

Today, most impact investors fall under the institutional investor definition, such as:

  • Banks
  • Pension funds
  • Hedge funds
  • Private foundations
  • Fund managers

However, many micro-investment networks and online platforms are increasingly opening the sector to small businesses and individual investors. This allows organizations large and small to accomplish even more good without relying on traditional investors.

Types of Impact Investing

Investments can occur in many forms. It can run the gamut of different projects, such as:

  • Providing microloans specifically to entrepreneurs in underprivileged groups
  • Developing clean energy initiatives
  • Widening access to education
  • Providing access to clean water
  • Investing in emerging markets

However, these impact investments can be split into two distinct categories. While similar, each type defines the method of choosing an investment.

  • ESG – ESG principles pertain to the material impacts of investment on its performance. Factoring in ESG enhances traditional financial analysis by identifying risks and opportunities. Although social good is a part of the calculations, ESG’s primary focus is economic gain.
  • SRI – SRI takes the social consciousness aspect one step further by defining concrete ethical guidelines and eliminating all investment opportunities that fail to meet them, regardless of financial performance.

Today, ESG investments tend to be more popular among investors. According to a 2020 study, 67% of investors looked for a market-rate return.

How to Create an Impact Investing Strategy

As an emerging investment niche, underwriting impact investing funds are more complex than signing up to any old platform and pressing a button. Instead, companies and individual investors must consider their goals, impact area, and success metrics before committing their funds.

This guide discusses how you can begin investing in improving society and the world.

Step One – Determine Your Impact Area

What are the issues that inspire you? What are you passionate about? Where would you most like to make a difference?

While some investors are unconcerned about which cause they support the most, the majority are driven by a particular issue.

For example, you may be passionate about clean energy or providing health advice to underprivileged women. Whatever it is, defining your chosen impact area guides where to begin searching for excellent investment opportunities.

Step Two – Define Your Goals

What do you hope to accomplish with your impact investment strategy?

If your goal is a specific market return — as with many institutional investors — this could be as simple as throwing out an average annual percentage return as the benchmark for making up your shortlist.

On the other hand, some companies may opt for this type of investment because they have identified it as an essential factor in convincing their target audience to purchase their products.

Other potential investors are driven entirely by their values and want to make a difference in something that inspires them.

Regardless, you must define clear written goals explaining your definition of success, how you hope to reach that goal, and a timeline for when you expect that goal to be achieved. This plan will help you to pick between viable investments.

Step Three – Find the Right Impact Investment

Countless projects have noted the rise of impact investments and are actively competing for your dollars. This competition makes it challenging to identify opportunities that meet your expectations.

Again, finding a suitable investment depends on your goals, but it also may be contingent on your desired level of participation.

For example, investors looking to diversify their portfolios, lessen potential volatility, and want a hands-off approach may choose a high-growth ESG fund or individual stocks in companies embracing ESG principles.

On the other hand, companies and investors may seek to put their funds to work within a project where they can enjoy more oversight and control. In these cases, they may enlist an independent research firm to score a project using the ESG system.

Step Four – Making Your Impact 

After shortlisting and settling on a project that meets your demands, you must ensure your investments get the desired results, as defined by the goals for your overarching strategy.

Several ways exist to make your impact felt. Firstly, you can use your shareholder voting rights to drive the company's direction.

Moreover, you can ask for an impact report. These reports are designed to hold companies and managers accountable for their actions. They also define how investment dollars are being spent and how they are creating change.

As a public-facing company, this data will also be vital in creating reports for your people. With solutions like UpMetrics, you can take your commitment to transparency further by incorporating quantitative data into qualitative data.

Instead of a stoic list of numbers, you can put the numbers to real faces to tell stories. Plus, you can use UpMetrics to make the numbers easier to understand for stakeholders everywhere through attractive and engaging visualizations.

How you report is just as important as how you act. By transforming how you measure impact, you increase your chances of attracting further investment to expand your impact footprint.

Tips for Managing Your Impact Strategy

If you are new to social impact investing, you may find it challenging to decide which cause is worthy of your funds. Get it wrong, and you could lose stakeholder and public trust.

Here are some extra tips to help you manage different aspects of your impact investment strategy:

  • Deploy the 3 I’s – Defined as intention, influence, and inclusion, the 3 I’s will enable you to discount various investment opportunities immediately.
  • Focus on the Doers – Using investment signals — some of which are provided by significant investment platforms — you can measure genuine real-world impact for different investments.
  • Ease Into the Market – Never put all your eggs in one basket like any investment. Start small, increase your knowledge base, and adjust accordingly to ensure consistent impact growth.
  • Go Deep – Spend the time to dig deep into different funds and investment opportunities to find hidden gems.
  • Stay Flexible – Goals, markets, and the world changes constantly. Adopt a flexible posture that allows you to pivot as needed to avoid wasting your dollars.

Over time, you will gain more experience in the sector, making you more proficient in using your time, human resources, and money for good. Whether you are a CEO, investor, or non-profit, increasing your understanding of the sector will guarantee a more significant overall impact on the world and a bigger return on your investment.

Make a Difference with UpMetrics

The key to a sustainable impact investment is its ability to tell its story and engage its target audience. Compelling, meaningful, and transparent data is the foundation of any successful movement.

At UpMetrics, we make it easy for stakeholders to manage their data and make it understandable. Our impact investing measurement tools make the process of gathering, processing, and reporting qualitative and quantitative data effortless to allow you to capture your impact at any point.

Contact us to learn why UpMetrics is the number one niche platform for impact investment reporting, and request your free demo today.

Cait Abernethy
Post by Cait Abernethy
June 14, 2023