The term ‘impact investing’ was coined in 2007, and has been used quite broadly to date. The most widely-cited definition comes from a 2010 report by J.P. Morgan, the Global Impact Investing Network (GIIN) and the Rockefeller Foundation, who described impact investments as “investments intended to create positive impact beyond financial returns.”
Impact investors seek to move beyond “doing no harm,” and towards intentionally deploying capital in ways that implement solutions to societal problems.
Impact investment is differentiated from traditional investment by:
1) Investor intention: Investors seek to allocate capital (debt, equity, or hybrid forms) to investments where they expect both a financial return (ranging from return of principal to market-beating returns) and a defined societal impact.
2) Investee intention: Business models for investees (whether they are for profit or non-profit enterprises, funds, or other financial vehicles) are intentionally constructed to seek financial and social value.
3) Impact measurement: Investors and investees are able to demonstrate how these stated intentions translate into measureable social impact.
Impact investing is often placed within a broader continuum of approaches that are grouped under the umbrella of ‘social finance’, which broadly incorporate social and environmental considerations. The figure below compares impact investing across a continuum of approaches that constitute social finance.
This evolving terminology includes terms such as responsible investment, community economic development, and venture philanthropy. While these strategies are related (and arguably, are important in their own right), we do not equate them with impact investing. A more sophisticated definition can be expected to emerge as the impact investing marketplace matures.
Like traditional financial markets, the impact investing marketplace includes those who supply capital, those who demand capital, and intermediaries and enablers. Impact investors supply the capital that funds projects, programs and businesses that deliver solutions to social and environmental problems. Impact investors can include governments, individuals, foundations, banks and pension funds.
The demand side of the market includes companies in myriad sectors, non-profits and charities, cooperatives, and projects that need capital to launch, operate or expand activities. Meanwhile, intermediaries and enablers support the placement of investments and the development of financial products, and can also play a role in helping entrepreneurs and organizations become investment-ready.
The Global Impact Investment Marketplace
Since 2010, J.P Morgan and the GlIN have annually conducted and made publicly available an impact investor survey and report that provides an overview of the global impact investment marketplace. Survey respondents were self identified impact investors including: fund managers, development finance institutions, foundations, diversified financial institutions, and other investors with at least USD 10 MM committed to impact investment.
In the 2014 report, Spotlight on the Market, respondents stated that they currently manage $46 B in impact investments with 70% invested in emerging markets and 30% in developed markets. The same respondents expected to commit an additional $12.7 B to impact investments; this represents a 19% increase in intentional impact investment since 2013.
The Canadian Impact Investment Marketplace
A scan of the marketplace has identified several types of investors who are seeking to deploy their capital through impact investing. An industry survey in 2013 indicated that there had been a 20% growth in the supply of capital from 2010 to 2012, with $5.3 B in impact-investing assets in Canada. Based on State of the Nation: Impact Investing in Canada, supply side actors, including Foundations, High Net Worth Individuals, Credit Unions, Banks, Pension Funds and Community Finance organizations have an estimated $2.1 B of impact assets under management. The report also outlines that as of 2012, there has been $1.5 B invested through impact investment products in various asset classes including private equity, public debt, private debt, venture capital, and cash and cash equivalent products.
The above content was provided by Purpose Capital. For more information on impact investing in Canada, read the State of the Nation report here.