When people hear ‘impact investing,’ they often think of philanthropy with a financial twist. But it’s more than that. Impact investments are about investing with intention—aligning your money with your values while still expecting solid financial returns. So, what really defines an impact investment?
Characteristics of an Impact Investment
Impact investments aren’t just about feeling good—they’re about doing good while achieving measurable results. Here’s what sets them apart:
Accretive
Think of additionality as adding value. Impact investments don’t just ride the wave of market trends; they actively contribute to solving real-world problems. Whether it’s supporting renewable energy or funding affordable housing, these investments create positive change. Like, funding the construction of new affordable housing, rather than investing in an apartment that already exists.
Measurable
If you can’t measure it, you can’t manage it. Impact investing thrives on data. Investors track both financial returns and the social or environmental impact their money is making. Are carbon emissions reduced? Has access to education improved? The proof is in the numbers.
Produce Economic Return
Unlike donations, impact investments are designed to generate financial returns. These can range from modest to competitive with traditional market investments, depending on the structure and goals of the investment.
Produce Specific ESG Return
Impact investments aren’t vague about their goals. They target specific Environmental, Social, and Governance (ESG) outcomes—like promoting clean energy, fostering diversity, or curing a disease. It’s about making sure your money works for more than just your bank account.
How Does This Compare to the GIIN Framework?
The Global Impact Investing Network (GIIN) offers its own definition of impact investing, focusing on:
- Intentionality: A clear aim to achieve positive social or environmental outcomes.
- Evidence and Impact Data: Using data to guide decisions.
- Manage Impact Performance: Continuously measuring and improving impact.
- Contribute to Solutions: Actively addressing social and environmental challenges.
While we align with GIIN’s core principles, our focus adds an extra layer: we emphasize how impact investments should be accretive and deliver specific ESG returns. It’s not just about having good intentions—it’s about tangible results and economic value.
Real-Life Examples: What Does Impact Investing Look Like?
Let’s break it down with three real-world scenarios:
1. Stock Market Investment: Impactful or Not?
- More Impactful: Investing in a renewable energy company with strong ESG practices. Your money helps scale clean energy solutions, reduce carbon footprints, and create green jobs. For example, purchasing shares in a solar energy firm that reinvests profits into R&D for more efficient panels not only supports financial growth but also drives innovation in sustainable energy technology.
- Not So Impactful: Buying shares in a tech giant just because it scores well on ESG metrics, without considering its actual impact. Sometimes, high ESG scores don’t tell the full story. A company might excel in corporate governance but contribute heavily to electronic waste or rely on energy-intensive data centers powered by fossil fuels, offsetting any positive ESG initiatives.
2. Loan to an Affordable Housing Charity
Investing with intention could mean providing a low-interest loan to a charity that builds affordable housing. You get a modest financial return, and your investment helps families find stable homes. For instance, your loan could fund the construction of energy-efficient apartments in underserved neighborhoods, reducing utility costs for residents and promoting sustainable living.
3. Investing in a VC Fund for Marginalized Entrepreneurs
Supporting a venture capital fund that backs startups led by women and minority entrepreneurs. You’re fueling innovation, promoting economic equity, and potentially earning high returns. For example, investing in a VC fund that supports tech startups founded by entrepreneurs from underrepresented backgrounds. This not only fosters diversity in the tech industry but also drives solutions tailored to underserved communities. By fostering economic equity and driving meaningful innovation, these investments can deliver both social impact and strong financial returns.
The Bottom Line
Investing with intention creates both strong financial returns and a lasting, positive impact on society and the environment. By focusing on investments that are accretive, measurable, and deliver both economic and specific ESG returns, you can grow your wealth while making the world a better place.
The way our family office helps clients make impact investments is by helping identify your values and goals. Then, crafting investment policies that support those intentions. Then, we search and screen for investment managers who will undertake the day-to-day decisions. Our role includes the monitoring, measurement, and reporting of outcomes.
Ready to see how impact investing can fit into your portfolio? Let’s talk.