Impact investing - What Does it Mean?

All investing aims to generate positive returns, but “impact investing” carries a coequal goal: creating a positive societal impact.

Investopedia defines “impact investing” as “making investments to help create beneficial social or environmental effects while generating financial gains.” Simply put, impact investors opt to put their money where their heart is and invest in asset classes — stocks, bonds, mutual funds, venture capital, real estate funds, etc.— that aim to help facilitate positive social outcomes.

These two goals — making money while supporting social enhancements — need not be mutually exclusive. Socially conscious investors can generate returns while supporting what they deem to be worthwhile causes.

According to the Global Impact Investing Network (GIIN), — one of the world’s most established and lucrative non-profit networks — impact investors are usually willing to sacrifice higher return expectations for what they perceive to be the greater good.

“Some intentionally invest for below-market-rate returns, aligning with their strategic objectives,” the GIIN explains. “Others pursue market-competitive and market-beating returns, sometimes required by fiduciary responsibility.”

In completing its 2023 Annual Impact Investor Survey, the GIIN found that among the social-impact investors the organization surveyed, most were willing to settle for “competitive, market-rate returns.”

Similarly, Fidelity Charitable determined that “investing for impact doesn’t necessarily mean you have to compromise financial returns.”  The charitable arm of Fidelity cites “numerous studies” that “have looked at the performance of impact investments and found that investing in sustainability has usually met, and sometimes exceeded, the performance of traditional investments.”

This is not to suggest that social impact investing is without controversy.

Last year, researchers from the Harvard Business School released “What Do Impact Investors Do Differently ?” in which the authors looked at how hundreds of social impact investment funds — pools of capital designed to enable social and environmental benefits while generating returns — performed. Among the report’s findings: to more effectively manage the risk inherent with many impact investments, some fund managers engage in “additionality"— supplementing their impact investments by raising capital from “traditional,” for-profit investment sources. As a result, HBS found that “Impact investment funds mostly buy stakes in companies that traditional financiers would have funded anyway.”

In other words, managing a portfolio of impact investments requires just as much strategic planning and compromise as traditional portfolios.