What is impact investing?
Put simply, impact investing is an investment strategy that seeks the dual purpose of creating beneficial social or environmental outcomes while also producing a positive financial outcome for the investor. What makes impact investing different from investing in any business that seeks a positive goal? The measurement of an impact through sophisticated reporting and metrics. Many investors will have stringent requirements that their investments must meet.
One of the positive things about impact investments is that they are not pigeonholed by sector, with opportunities in such fields as affordable housing, solar power, education, energy, water and welfare, though reporting will vary significantly between them.
Who is making impact investments?
Impact investing is attracting a wide range of investors, both individual and institutional. Fund managers, financial institutions, banks, pension funds, governments, insurance companies, family offices, retail investors and NGOs are just a few examples of entities that are investing under the banner of impact investing. Watch our video on how to create a sustainable startup that can attract impact investment here.
How do impact investments perform financially?
A common myth is that impact investments offer lower returns. While some impact investors are happy to accept below market-rate returns if an opportunity lines up with their strategic intention, it’s equally common for investors to seek out market-beating rates. Respondents in the Global Impact Investing Network’s (GIIN) 2020 Annual Impact Investor Survey reported that performance meets or exceeds their expectation for financial return.
The challenge of reporting
Impact measurement is a challenge because of the wide range of methodologies that are emerging from investors and businesses in the sector. Key players in the market, such as the World Economic Forum and the Rockefeller Foundation, have taken steps to standardise reporting, coming up with interesting metrics such as the social return on investment (SROI). For now, defining impact varies somewhat on a case-by-case basis. Many investors have their own benchmarks, assessing the relevance and scale of an opportunity, their desired outcome and estimated economic value to the world.
What can my startup do to appeal to an impact investor?
Be in a position where you’ve got a fundable plan, with special care given to de-risking your activities. Trials will show you have a viable offering; customer trials will show you have a product that is accepted by the market. Reporting should be at the heart of your offering, and impact investors will look favourably on those who have done the work for them. Make sure you’re solving a problem and doing it in a way that drives profit.
You can also find out what sustainable investors want to see here.
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