Aligning Profit With Purpose – The Rise of Impact Investing

Impact investing has attracted the interest of investors and stakeholders from diverse fields, while advances in measurement increase its likelihood of producing market-rate financial returns.

As we move into the future, we anticipate an increasing prevalence of products that combine impact with financial design, such as bonds or publicly listed equities with embedded impact incentives, making them more transparent, accountable and straightforward for investors.

Investing with Purpose

Since the financial crisis, investing has undergone dramatic change. Investors are becoming more interested in simultaneously realizing financial profits and positive social or environmental outcomes with their investments – leading to impact investing, which offers powerful ways of addressing serious social concerns while still yielding market rate returns.

While impact investment has drawn increased scrutiny and scepticism from critics, especially regarding impact washing (attributing impact where it isn’t warranted), improved standards of measurement and management are helping ease concerns over this practice. It is anticipated that over the coming decade impact investing will experience further growth thanks to more liquid instruments (including public debt and equity funds ) designed for this specific purpose.

Additionally, impact investing could grow increasingly popular over the next decade as $40 trillion transfers from baby boomers to millennials, who have shown significant interest in aligning their investments with their values. This could provide significant momentum to this type of investing if accompanied by incentives that shift away from rewarding fund managers based on short-term financial returns and towards rewarding impact performance through employee compensation schemes.

Investing for Impact

As families seek ways to align their financial investments with their values and social impact goals, they face unique challenges. First, they require better tools and resources for assessing impacts of investments they hold; also it must be avoided that companies or investors make false claims regarding positive social impacts of products or services that cannot be supported with evidence.

Business has well-accepted tools for estimating an investment’s expected financial returns; however, no such system exists to assess social and environmental returns from impact-oriented investments. Rise and Bridgespan have conducted an experiment in which financial underwriting techniques will be applied to evaluate social and environmental impact assessments.

This project has yielded a tool we and others are now using to assess product reach (how many people will be reached) and expected value of an impact-oriented business. We hope that its development will allow more families to make informed investment decisions around impactful businesses.

Investing for Profit

There’s an increasing recognition that values and profit don’t need to be mutually exclusive; investors can pursue market-rate financial returns while making positive social and environmental contributions.

Community development investing provides entrepreneurs and companies with an additional way to tackle some of the world’s greatest challenges, such as housing, education, healthcare or other essential services to underserved communities.

Impact investing has experienced rapid growth over the last several years, yet its risks cannot be underestimated. Investors need more information to assess these investments accurately and avoid impact washing – companies making false or misleading claims about their impact credentials – which may occur.

Investors currently can only gather limited information about a company’s impact through ESG reports or track record analysis, but some groups are working to apply the rigorous standards of financial underwriting to evaluate impact evaluation. One such collaboration between Rise Fund, a $2 billion impact investment firm, and Bridgespan Group created an tool which predicts–before any money is invested–its financial value associated with any likely social and environmental impacts of companies.

Investing for Change

Investors today are increasingly drawn to investments that bring both financial and social returns, particularly young generations such as millennials and women who desire a mutual alignment of values with their investment choices. This rising demand has given birth to impact investing.

As an emerging field, impact investing faces numerous obstacles. While the business world provides tools for estimating financial yields of potential investments, no similar tools exist for forecasting social and environmental benefits in dollar terms; forecasting is often done via guesswork.

Measurement frameworks also need improvement. In order to avoid the drawbacks associated with country-specific metrics (like Rise Fund’s “savings per life” method), an industry standard method for gauging social impact that does not favor any region or geographical area is needed – something Rise Fund and other investors, foundations, and businesses are attempting to address. Our work with them on this matter is vitally important in creating impact underwriting on par with financial underwriting.

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