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Impact Investing 101

Impact investing has become a buzzword over the past couple years. Many people aren’t just talking about it, they’re deploying capital as well. As of 2016, $1 out of every $5 is invested into sustainable investments, which equates to $8.72 trillion.[1] These days there is an overwhelming amount information about impact investing that can make it difficult to find the basics in one place. As many investors are increasingly curious about this topic, we thought it would be helpful to share a 101 overview of the sector and provide further resources to our community.

Impact Investment:

Definition: Investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.[2]

The History of Impact Investing

The term “impact investing” was created in 2007 at a meeting at The Rockefeller Foundation’s Bellagio Center; however, the practice of expressing social or environmental change through portfolio management began centuries earlier.[3] In the 18th century, the Methodist church denounced the slave trade and smuggling. They continued to avoid investing in sin stocks (alcohol, tobacco, gambling products, etc.) over the past several decades.[4] In the 1800s, The Quakers prohibited investing in slavery and war.[5] Students urged universities to divest from military contractors during the Vietnam War in the 1960s.[6] In the 1980s, investors voiced their discontent with apartheid by screening South African investments.[7] In the late 20th century, important strands of the impact investing community were developed by cooperative movements, the CDFI industry, international development entrepreneurs and social entrepreneurs. Today, impact investors often activate their entire portfolio, across all asset classes and all corporate engagement strategies, toward their social and/or environmental goals.

What does this mean?

The world of impact investing is riddled with acronyms and different terminology. Here’s a breakdown of some of the key acronyms and what each term means.

The world of impact investing is riddled with acronyms and different terminology

B-Corp: Organizations certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency.[8]

Benefit Corp: A new corporate form, legal in 31 states including Delaware, that creates a durable legal and governance framework to uphold higher standards of corporate purpose, accountability, and transparency.[9]

BoP: Base of the pyramid. Groups of people in emerging markets who earn less than $3,000 per year.[10]

CDFI: Community Development Finance Institution. A financial institution that provides credit and financial services to underserved markets and populations. They have a primary mission of community development, serve a target market, are a financing entity, provide development services, remain accountable to its community, and are a non-governmental entity.[11]

CSR: Corporate social responsibility. Corporate initiative to assess and take responsibility for the company's effects on the environment and impact on social welfare.[12]

ESG: Environmental, social, and governance. This refers to three common areas of concern that socially responsible investors focus on when looking at the ethical impact of a company. These can include climate change and sustainability (environmental); diversity and consumer protection (social); and management structure and employee relations (governance).[13]

GIIRS: Global Impact Investing Rating System. This is a project of B Lab that assesses the social and environmental impact and practices (but not the financial performance) of companies and funds using a ratings methodology that has now been used by more than 6,000 companies.[14]

IRIS: Impact Reporting and Investment Standards. These metrics are managed by the Global Impact Investing Network (GIIN) and are designed to measure the social, environmental, and financial performance of an investment.[15]

Microfinance: The provision of financial services to micro-entrepreneurs and small business owners, who lack access to banking and related services due to the high transaction costs associated with serving these client categories. Microfinance gives low-income individuals or groups access to capital that they would otherwise be denied, which can support them in becoming more self-sufficient.[16]

MRI: Mission Related Investing. The practice of aligning a philanthropic organization's management of assets with its charitable purposes while sustaining long-term financial return.[17]

Place-based investing: Investing with the goal of impacting a specific city or region.

PRI: Program Related Investments. As a tool for private foundations, these investments can take on almost any structure, so long as advancement of the foundation’s mission, not financial gain, is the primary purpose. PRIs are counted as part of the annual distribution (at least 5% of its endowment) a private foundation is required to make.[18]

SRI: Socially responsible investing. An investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity.[19]

Triple Bottom Line: An accounting framework for sustainability that takes social, environmental, and financial dimensions into account. There is no single method for measuring triple bottom line.[20]

Venture capital: Funds used to start a new business or enterprise. Because new ventures generally entail high risks, investors often choose to provide this capital in return for part ownership of the enterprise rather than a loan.[21]

 

How to do Impact Investing

As noted above, impact investing got its start through investors avoiding certain stocks such as alcohol, tobacco, or firearms. Today, the field of impact investing has evolved substantially to include a multitude of different techniques to align investors’ portfolios with their values, leveraging all asset classes.

Negative Screens: Refraining from investing in organizations that derive revenue from the so-called “sin industries.” These can include avoiding industries such as firearms, gambling, tobacco, and/or animal fur and business practices such as animal testing, factory farming, poor human rights track record, and/or predatory lending.

Positive Screens: Investors can also choose to proactively invest in companies and/or business practices that benefit society. Investors can choose a CSR focus such as gender diversity, reporting transparency, and/or sustainable banking. You can also select industries to invest in such as affordable housing, education, and/or financial wellness.

Positive Screens

Shareholder Advocacy: Sometimes people invest in companies that partake in some of the negative behavior mentioned above for the purpose of shareholder engagement. This helps them make their voice heard to other owners of the company to influence corporate behavior.

Placed Based Investing: This practice focuses on socially responsible investments on specific communities or geographies to make an impact in an area that is important to the investor.

Capacity Building and Catalytic Investing: These types of investments drive innovation and change in the field to grow the sector. Some investors will consider first-time funds without a proven track record in order to achieve impact goals or catalyze the impact investment market.

How do you measure the nonfinancial impact of your investments?

It is important to measure both the financial and social impact of your socially responsible investments. One way to think about measuring impact is by how investments can change certain aspects of people’s lives such as: their way of life, their community, their political decision-making power, their environment, their health, and their personal and property rights.[22]

There are several organizations that can help measure the social and/or environmental impact of investments. These include, but are not limited to, the following:

GIIRS: As mentioned above, the Global Impact Investing Rating System (GIIRS) is a project of B Lab that assesses the social and environmental impact and practices of companies and funds. This can help investors find GIIRS rated companies and funds, measure and evaluate their impact through the rating system, benchmark and report companies and funds, and improve the non-financial impact of investors.

B Lab: B Lab is a nonprofit organization that serves a global movement of people using business as a force for good™. B Lab does this by building a community of certified B Corporations™ who meet the highest standards of verified, overall social and environmental performance, public transparency, and legal accountability. B Lab also helps businesses, investors, and institutions measure what matters using the B Impact Assessment and B Analytics to manage their impact.

IRIS: The Impact Reporting and Investment Standards are managed by the Global Impact Investing Network (GIIN). IRIS catalogs the most useful metrics from across the industry in one place. Over 5,000 organizations are currently using IRIS to evaluate, communicate, and manage their social and environmental performance. IRIS also incorporates with widely accepted third party standards whenever possible.

Who is doing impact investing?

The 2016 GIIN Annual Impact Investor Survey is a great resource that provides a state of ecosystem for impact investing. The facts below are taken from this survey.

  • The top geographies in terms of amount of capital allocated are in North America, Sub-Saharan Africa, and Latin America and the Caribbean.
  • Most organizations in the survey sample are headquartered in developed markets
  • 59% of respondents identified as fund managers
  • 13% of respondents identified as foundations
  • The largest sectors by asset allocation are housing, microfinance, and other financial services.

The US SIF: The Forum for Sustainable and Responsible Investment also produces a biennial report on Impact Investing Trends. Here are some facts from their recently released 2016 report:

  • The report identified 300 money managers, 477 institutional investors, and 1,043 community investing institutions that incorporate ESG issues into their investment decision-making
    • ESG Incorporation by Money Managers by assets under management (AUM):
    • Environmental investment factors represent $7.79 trillion in AUM
    • Social criteria represents $7.78 trillion in AUM
    • Governance issues represent $7.70 trillion in AUM
  • Climate change is the most significant environmental factor in terms of assets for both money managers and institutional investors
  • The Top Shareholder Resolutions Filed in 2015
    • Social: Political Spending/lobbying
    • Environmental: Climate Change
    • Governance: Equal Employment Opportunity

Where can I find more resources about impact investing?

The Global Impact Investing Network (GIIN). The GIIN is a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing. The GIIN builds critical infrastructure and supports activities, education, and research that can help accelerate the development of a coherent impact investing industry.

Mission Investors Exchange (MIE). MIE is the leading voice for philanthropy and mission-aligned investors in the impact investing market. A national network of over 250 foundations and affiliate members, MIE offers a robust platform for sharing tools and best practices, empowers foundations and other investors to take bolder steps to align their assets with mission, provides access to investment opportunities, and promotes the policy and market conditions necessary to grow the impact investing field.

Confluence Philanthropy. Confluence Philanthropy is a non-profit, membership-based association of foundations, high net worth investors and their investment advisors who collaborate in Mission-Related Investing (MRI), the process of integrating investment strategy with social and/or environmental goals. Confluence Members represent a combined $3 trillion in assets under management, with more than $61.5 billion designated as philanthropic capital. Members are committed to full mission alignment when prudent and feasible. Based in the United States, Europe, Latin America, Canada and Puerto Rico, our members collectively invest around the world.

Stanford Social Innovation Review (SSIR). SSIR informs and inspires millions of social change leaders from around the world and from all sectors of society—nonprofits, business, and government. With webinars, conferences, magazines, online articles, podcasts, and more, SSIR bridges research, theory, and practice on a wide range of topics, including human rights, impact investing, and nonprofit business models. SSIR is published by the Stanford Center on Philanthropy and Civil Society at Stanford University.

Toniic. Toniic is the global action community for impact investors. It serves individuals, family offices, foundations and funds. Its goal is to increase the velocity of money and services into impact investing to address global challenges. Its members commit to discover, evaluate, nurture and invest in financial products – in all asset classes – that promote a just and sustainable economy. Through the 100%IMPACT members of Toniic, it shares portfolios and learns, together, how to best align financial assets with personal values.

The ImPact. The ImPact’s members are families, joined together by a shared Pact. The Pact calls families to simple yet powerful actions to improve the impact of their investments. The ImPact seeks to inspire families to make more impact investments more efficiently.

US SIF: The Forum for Sustainable and Responsible Investment is a leading voice advancing sustainable, responsible, and impact investing across all asset classes. Resources include introductions to integrating environmental, social, and governance (ESG) issues into investment choices and information about financial performance with SRI. They also include fact sheets on proxy voting and shareholder resolutions.

Play BIG. Play BIG is an intimate gathering that inspires and informs people with large capital reserves who seek to align their money more fully with their values. Play BIG’s model of interactive inquiry encourages innovative approaches to deploying capital through investment and philanthropy to affect positive social and environmental change.

Gratitude Railroad. Gratitude Railroad serves as a community and catalyst for 100+ community members to learn, discuss and invest across asset classes focused on delivering top tier returns and helping to solve environmental and social challenges. Their members have achieved significant success as investors, operators and entrepreneurs across various sectors and stages in the conventional capital markets.

Harvard Kennedy School. The Kennedy School’s renowned faculty and pioneering research centers deliver bold new ideas. The school offers impact related programs and a Social Impact Bond Technical Assistance Lab that helps state and local governments develop pay for success contracts using social impact bonds.

Wharton Business School. Wharton offers social impact and responsibility as an area of study. The Wharton Social Impact Initiative leverages the power of Wharton to develop and promote business strategies for a better world. Through research, hands-on training, and outreach, they strive to advance the science and practice of social impact.

Fuqua Business School. The Fuqua School of Duke University offers the Center for the Advancement of Social Entrepreneurship (“CASE”). CASE’s mission is to prepare leaders and organizations with the business skills needed to achieve lasting social change.

What are some of the common concerns around impact investing?

Many involved in socially responsible investing are concerned with sacrificing financial return and how to measure the financial and nonfinancial impact of their investments. We will be covering both of these concerns in future blogs.

© 2016 Threshold Group is a Registered Investment Adviser.
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Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances. Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise. Impact investing occurs across asset classes, for example private equity / venture capital, debt, and fixed income.

Impact investors are primarily distinguished by their intention to address social and environmental challenges through their deployment of capital. For example, criteria to evaluate the positive social and/or environmental outcomes of investments are an integrated component of the investment process. In contrast, practitioners of socially responsible investing also include negative (avoidance) criteria as part of their investment decisions. Threshold Group makes no representations or guarantees that any specific investment opportunities will meet such goals of impact investors or impact investments.

[1] Report of US Sustainable, Responsible, and Impact Investing Trends. Fast Facts. (2016). http://www.ussif.org/trends
[2] What You Need to Know About Impact Investing. The GIIN. https://thegiin.org/impact-inv...
[3] Innovative Finance. The Rockefeller Foundation. https://www.rockefellerfoundat... 
[4] Berry, M. History of Socially Responsible Investing in the U.S. (2013). Thomson Reuters. http://sustainability.thomsonr...
[5] Ibid
[6] Ibid
[7] Ibid
[8] Glossary of Impact Investing Terms. Confluence Philanthropy. http://www.confluencephilanthr... Corporation
[9] Ibid
[10] Impact Investing Glossary. Inside NGO. http://www.icnl.org/globalforu...
[11] Glossary of Impact Investing Terms. Confluence Philanthropy. http://www.confluencephilanthr... Corporation
[12] Ibid
[13] Ibid
[14] What is a GIIRS Impact Rating? http://giirs.nonprofitsoapbox....
[15] IRIS Metrics. https://iris.thegiin.org/metri...
[16] Glossary of Impact Investing Terms. Confluence Philanthropy. 
http://www.confluencephilanthr... Corporation [17] Glossary of Impact Investing Terms. Confluence Philanthropy. http://www.confluencephilanthr... Corporation
[18] Glossary. Mission Investors Exchange. https://www.missioninvestors.o...
[19] Glossary. Mission Investors Exchange. https://www.missioninvestors.o...
[20] Glossary of Impact Investing Terms. Confluence Philanthropy. http://www.confluencephilanthr... Corporation
[21] Ibid
[22] Reeder, N. and Colantonio, A. Measuring Impact and Non-Financial Returns in Impact Investing. (2013). https://files.lsecities.net/fi...

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