Impact Investing

This chapter introduces the key concepts, opportunities, and challenges of impact investing, a subset of sustainable finance characterized by the intentionality of an investment. Impact investing is a term coined by the Rockefeller Foundation in 2007 to describe investments that generate a social and/or environmental impact alongside a financial return. Different organizations use the term “impact investing” to describe different practices. Some investors retain a strict definition, that is, investments that themselves create impact. Other investors use the term interchangeably with sustainable and environmental, social, and corporate governance (ESG) investing. Yet others define impact investing as investing in companies whose intent is to have impactful products and services — whether or not the investor and their capital contributed to that impact. For the purposes of this chapter, impact investing is defined as an investment strategy that can deliver both financial returns and positive social and environmental outcomes — beyond what would otherwise have occurred had the investment not been made. The chapter lays out why impact investing matters and what sets it apart from other sustainable finance strategies. This type of investment considers factors beyond financial return and includes the double/triple bottom line without necessarily impairing the traditional alpha, as illustrated in the section on returns-on-investment. Finally, the chapter explores how to report on the impact. The chapter concludes that only a fraction of total investment made globally qualifies as impact investment. It often excludes the bulk of the development finance, renewable energy, clean tech, sustainable forestry, and the healthcare, education, and other social sectors, where the impact qualification remains inconsistent, either because of lack of intentionality or because of labeling concerns by the investors.