What Is Impact Investing? How It Works and How It Creates Impact
Investing is really about putting money to work with the expectation of material results. Impact investing aims to go further: making profits while generating social or environmental positive impact. In other words, impact investments have a dual purpose of offering financial return and are in line with the investor's conscience.
According to the Global Impact Investing Network, the term was coined in 2007. But the Rockefeller Foundation suggests that several financial investors had already developed approaches to “socially-concious investment”. For example, Jacqueline Novogratz with the non-profit Acumen Fund or Muhammad Yunus with Grameen Bank in Bangladesh.
ESG vs Impact Investing: What’s the Difference?
ESG stands for Environmental, Social, and Governance. It refers to a set of criteria used to evaluate companies' performance in these areas. Investors who use ESG criteria typically screen companies based on their environmental impact, social responsibility, and governance practices.
Impact investing, on the other hand, is all about investing in companies that have a positive impact on society and the environment. Impact investors aim to generate a measurable, beneficial social or environmental impact alongside a financial return. The key difference between ESG and impact investing is that ESG looks at a company's performance in certain areas, while impact investing looks for specific outcomes.
For example, an ESG investor may choose to invest in a company that has strong environmental policies, even if that company is not directly working to solve a specific social or environmental problem. An impact investor, on the other hand, would seek out companies that are working to solve a specific problem, such as reducing greenhouse gas emissions or improving access to clean water.
ESG and impact investing can be complementary strategies, as many companies that perform well on ESG criteria also have a positive impact on society and the environment. However, there are some key differences in how the two strategies are implemented.
ESG investing typically involves screening companies based on specific ESG criteria. And then investing in those that meet those criteria. Impact investing, on the other hand, involves investing directly in companies or projects that are working to solve specific social or environmental problems.
Another key difference between the two strategies is their focus. ESG investing focuses on a company's policies and practices, while impact investing focuses on the outcomes This means that impact investors are looking for measurable results, such as a reduction in carbon emissions or an increase in access to clean water.
Impact investing in practice
Some of the world’s largest foundations actively allocate part of their capital to impact-focused investments. The Gates Foundation manages an endowment of nearly USD 50 billion, with approximately 5% invested in ventures aimed at improving health, education, and gender equality.
The Soros Economic Development Fund contributes to the Open Society Foundations, with around USD 18 billion in assets. Roughly 5% of this capital is allocated to impact ventures focused on democracy, legal reform, higher education, and journalism.
The Ford Foundation, established in 1936 by Edsel and Henry Ford, is one of the earliest and largest examples. With an endowment of around USD 16 billion, the foundation announced in 2017 that approximately USD 1 billion would be invested in ventures aligned with its social and environmental priorities.
Does Impact Investing Deliver Financial Returns?
A common question is whether impact investing generates returns comparable to traditional investments. Most impact investors target market-rate or near-market returns, depending on the asset class and strategy.
Research from the University of California, Berkeley shows a median internal rate of return (IRR) of 6.4% for impact investments, compared to 7.4% for non-impact, “agnostic” funds. While historical data suggests slightly lower average returns, 88% of impact investors report that their portfolios meet or exceed expectations.
The International Finance Corporation (IFC) has also noted that certain private equity impact investments can outperform benchmarks, in some cases delivering returns higher than the S&P 500. These findings suggest that while comparisons vary, impact investing is not inherently at odds with financial performance.
Financial outcomes in impact investing vary by structure and strategy, reflecting the same market dynamics that apply to traditional investments.
Table of Contents
What Is Impact Investing? How It Works and How It Creates Impact
Investing is really about putting money to work with the expectation of material results. Impact investing aims to go further: making profits while generating social or environmental positive impact. In other words, impact investments have a dual purpose of offering financial return and are in line with the investor's conscience.
According to the Global Impact Investing Network, the term was coined in 2007. But the Rockefeller Foundation suggests that several financial investors had already developed approaches to “socially-concious investment”. For example, Jacqueline Novogratz with the non-profit Acumen Fund or Muhammad Yunus with Grameen Bank in Bangladesh.
ESG vs Impact Investing: What’s the Difference?
ESG stands for Environmental, Social, and Governance. It refers to a set of criteria used to evaluate companies' performance in these areas. Investors who use ESG criteria typically screen companies based on their environmental impact, social responsibility, and governance practices.
Impact investing, on the other hand, is all about investing in companies that have a positive impact on society and the environment. Impact investors aim to generate a measurable, beneficial social or environmental impact alongside a financial return. The key difference between ESG and impact investing is that ESG looks at a company's performance in certain areas, while impact investing looks for specific outcomes.
For example, an ESG investor may choose to invest in a company that has strong environmental policies, even if that company is not directly working to solve a specific social or environmental problem. An impact investor, on the other hand, would seek out companies that are working to solve a specific problem, such as reducing greenhouse gas emissions or improving access to clean water.
ESG and impact investing can be complementary strategies, as many companies that perform well on ESG criteria also have a positive impact on society and the environment. However, there are some key differences in how the two strategies are implemented.
ESG investing typically involves screening companies based on specific ESG criteria. And then investing in those that meet those criteria. Impact investing, on the other hand, involves investing directly in companies or projects that are working to solve specific social or environmental problems.
Another key difference between the two strategies is their focus. ESG investing focuses on a company's policies and practices, while impact investing focuses on the outcomes This means that impact investors are looking for measurable results, such as a reduction in carbon emissions or an increase in access to clean water.
Impact investing in practice
Some of the world’s largest foundations actively allocate part of their capital to impact-focused investments. The Gates Foundation manages an endowment of nearly USD 50 billion, with approximately 5% invested in ventures aimed at improving health, education, and gender equality.
The Soros Economic Development Fund contributes to the Open Society Foundations, with around USD 18 billion in assets. Roughly 5% of this capital is allocated to impact ventures focused on democracy, legal reform, higher education, and journalism.
The Ford Foundation, established in 1936 by Edsel and Henry Ford, is one of the earliest and largest examples. With an endowment of around USD 16 billion, the foundation announced in 2017 that approximately USD 1 billion would be invested in ventures aligned with its social and environmental priorities.
Does Impact Investing Deliver Financial Returns?
A common question is whether impact investing generates returns comparable to traditional investments. Most impact investors target market-rate or near-market returns, depending on the asset class and strategy.
Research from the University of California, Berkeley shows a median internal rate of return (IRR) of 6.4% for impact investments, compared to 7.4% for non-impact, “agnostic” funds. While historical data suggests slightly lower average returns, 88% of impact investors report that their portfolios meet or exceed expectations.
The International Finance Corporation (IFC) has also noted that certain private equity impact investments can outperform benchmarks, in some cases delivering returns higher than the S&P 500. These findings suggest that while comparisons vary, impact investing is not inherently at odds with financial performance.
Financial outcomes in impact investing vary by structure and strategy, reflecting the same market dynamics that apply to traditional investments.
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