Investing can have multiple purposes. Earning long-term returns, growing wealth, and supporting retirement are all common goals of investment. Yet investing can be about so much more than making a financial profit, says Chris Kuchanny. With the right mindset, focus and guidance, your investments could also help support people in need, grow your community, help the environment, or in hundreds of other ways make a tangible positive impact on the world around you. Integrating such goals into your investment decisions is the simplest way to portray "Impact Investment."
This idea of impact integration is key to understanding Impact Investment, and important to keep in mind. But to more fully understand Impact Investment, we need to delve a little deeper.
The Impact Investment Storyline
The origins of Impact Investment help us understand what it is and how it fits in today's investment landscape. The term "Impact Investment" was coined in the early 2000s to describe a variety of investment practices designed to generate positive environmental or social impact, alongside financial returns.
While the term "Impact Investing" is relatively new, the philosophy behind it is not. As the industrial revolution got underway in the 18th Century, ethical investment practices were employed by Methodists and Quakers who advocated for businesses to “Do no harm,” and for the avoidance of “Sin Stock” sectors such as tobacco, weapons, and slavery. This exclusion-based methodology was the starting place of modern Responsible Investment (aka Socially Responsible Investment, or SRI).
Next came Sustainable Investment, rising in prominence in the 1980s when institutional investors were pressured to use investments to positively impact issues of the day, such as South African apartheid. The UN's Rio summit of 1992 added focus on environmental issues and cemented the term in global circles. The aim of Sustainable Investment is for capital to contribute to a sustainable economy, by minimising natural and social resource depletion. Whereas Responsible Investment employs a negative screening approach focused on Social and Environmental risks, Sustainable Investment also considers related benefits and investment opportunities.
The term ESG (meaning Environmental, Social and Governance) was coined by the UN Global Compact in 2000. ESG is a framework that was designed to help the financial industry better integrate E, S and G issues into decision making. Today, ESG is commonly used to describe a broad array of approaches from SRI to Impact Investment. This is often incorrect, as ESG is not a standalone investment strategy, it is a methodology for evaluating company impact. Chris Kuchanny believes that this results in confusion, as investors cannot rely on the term ESG to mean that an investment is aligned with the impact they want. Regulatory standards are rising and taxonomies are being established to improve ESG reporting. But until common global standards are implemented, investors need to perform their own research to determine if an ESG investment is likely to meet their impact goals.
Defining Impact Investment
This background helps us form an answer. Impact Investment incorporates all the preceding investment approaches - it is Responsible, and Sustainable, and ESG. However, Impact Investing goes a step further, by integrating social and/or environmental impact goals into the investment process - goals that are measured, monitored, and reported on.
Unlike Philanthropy, Impact Investments receive financial returns, which can range from little more than capital preservation to competitive market rates. Notably, according to GIIN's 2020 Annual Impact Investor Survey, 67% of Impact Investors expect risk-adjusted market-rate returns. This demonstrates that impact investments commonly gain all the above impact characteristics and receive competitive financial returns.
Spectrum of Capital
This range of investment categories are depicted in the “Spectrum of Capital” below - which is based on a version released by the OECD, that has been updated by Chris Kuchanny, below:
Investments that Benefit the World
The ultimate goal of impact investment is to generate financial returns by using capital to address our world's most challenging problems. Whether you're passionate about renewable energy sources, protecting nature through conservation, making microloans more accessible to those who need them, healthcare, or education, there are investment opportunities that can support these missions and improve your financial portfolio.
So there we have it - apparently, it is possible to have our cake and eat it. And because impact investments consistently yield competitive returns, more and more investors are showing interest. If you can solve the world's problems, while also making sound and profitable investments, says Chris Kuchanny, why wouldn't you?