What is impact investing?
With the rapid growth in responsible investing (RI) – also known as “socially responsible investing” and “ESG investing” – in recent years, there’s a lot of new jargon making its way into the investment mainstream. From “ethical”, “thematic” and “values-based” investing to “community investing” and “green bonds”, it’s sometimes difficult to figure out how they differ and where they overlap. And it doesn’t help that there’s disagreement about terminology within the financial industry. All of these terms, in some form, refer to investment strategies that are based on a set of socially responsible guidelines in addition to the usual financial value measures of a company/issuer.
In recent years, the term “impact investing” has also increased in prominence. So, what is impact investing and how does it fit in to RI?
Impact investing is next-level RI
According to the Global Impact Investing Network (GIIN), impact investments are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.1 Canada’s Responsible Investment Association (RIA) defines responsible investing as “the incorporation of environmental, social and governance factors (ESG) into the selection and management of investments.”2
The definitions sound quite similar, but there are some distinct differences. In impact investing, which is a type of RI, an asset manager takes it beyond the analysis of ESG ratings (or ESG scores), actively identifying companies that are making measurable contributions to help solve some of the world’s major challenges – all while generating returns for investors. In other words, impact investing more actively supports companies that make a positive impact on society – and is sometimes seen as a more philanthropic approach to investment.3
The focus of impact investing
Impact investing goes deeper. The GIIN characterizes impact investing as providing capital to address the globe’s biggest social and environmental problems – the “pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.”4
One of the important hallmarks of impact investing is measurement. Asset managers do more than review ESG scores. They measure and report the positive impact of investors’ money, showing where and how progress has been made toward goals.
Impact investing examples
Impact investing can refer to “green bonds”, which are debt instruments used to raise funds for environmentally positive projects, including infrastructure to mitigate climate change. Other examples of impact investing include social impact bonds, investment funds, venture capital funds, and private equity funds targeted to goals like providing clean water to communities, delivering affordable housing, or providing micro-loans to small entrepreneurs.
How you could invest with impact
One of the key features of impact investing is that it’s done by institutional investors, such as mutual fund and investment fund companies, financial institutions and other asset managers. This scale is how impact investing can make a measurable difference toward those large and pressing issues.
As an individual investor, there is a growing number of opportunities for you to participate in impact investing. NEI Investments, our sister company and a long-time leader in RI investment solutions, is one example of an asset manager that provides individual investors with opportunities to invest with impact. In fact, the NEI Global Impact Initiative is the first suite of global impact funds offered in Canada, offering investors a choice of fixed income, balanced and equity mandates.
It’s just one of the ways you could invest in the companies that are helping to solve the biggest global challenges of climate change, resource scarcity and equality. Impact investing lets you put your money into investments that help make measurable improvements to society and the environment, while pursuing your own financial goals.
Find out more about responsible investing and ESG ratings, and how you might be able to incorporate them into your portfolio.
1 The Global Impact Investing Network, https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing.
2 Responsible Investment Association, https://www.riacanada.ca/responsible-investment/.
3 Investopedia, Sustainable Investing, https://www.investopedia.com/terms/i/impact-investing.asp.
4 The Global Impact Investing Network, https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing.
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