Investopeadia: Impact Investing

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DEFINITION of 'Impact Investing'

Impact investing is investing that aims to generate specific beneficial social or environmental effects in addition to financial gain. Impact investing is a subset of socially responsible investing (SRI), but while the definition of socially responsible investing encompasses avoidance of harm, impact investing actively seeks to make a positive impact by investing, for example, in non-profits that benefit the community or in clean technology enterprises.

BREAKING DOWN 'Impact Investing'

The term "impact investing" was first coined in 2007, although the practice developed over years beforehand. The basic goal of impact investing is to help reduce the negative effects of business activity on the social environment, and it can be considered an extension of philanthropy.

How Does Impact Investing Work?

Impact investing requires investors to consider a company's commitment to corporate social responsibility (CSR), or the sense of duty to positively serve society as a whole, before becoming involved with that company. This societal impact differs depending on the industry and the specific company within that industry, but some common examples include giving back to the community by helping the less fortunate or investing in sustainable energy practices.

Impact investing includes many different forms of capital and investment vehicles. The bulk of impact investing is done by institutional investors, but a range of socially conscious financial service companies, web-based investment platforms, and investor networks now offer individuals an opportunity to participate in it. One major venue is microfinance loans, which can provide small-business owners in emerging nations with startup or expansion capital. Women are often the beneficiaries of such loans. Impact investing need not always be profitable; investors often factor in social gains or goals.

Financial Benefits of Impact Investing

Because socially and environmentally responsible practices tend to attract impact investors, companies can financially benefit from committing to socially responsible practices, and investors also tend to profit. A 2013 study by GIIN and JP Morgan found that over 90% of impact investors reported that their investments were meeting or surpassing their projections.

The Future of Impact Investing

Impact investing appeals largely to younger generations, such as millennials, who want to give back to society, so this trend is likely to expand as these investors gain more influence in the market. By impact investing, individuals or entities essentially state that they support the message and the mission of the company in which they're investing, and they have a stake in the company's welfare. As more people realize the social and financial benefits of impact investing, more companies will engage in social responsibility.
Socially Responsible Investment - SRI
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An investment that is considered socially responsible because of the nature of the business the company conducts. Common themes for socially responsible investments include avoiding investment in companies that produce or sell addictive substances (like alcohol, gambling and tobacco) and seeking out companies engaged in social justice, environmental sustainability and alternative energy/clean technology efforts. Socially responsible investments can be made in individual companies or through a socially conscious mutual fund or exchange-traded fund (ETF).

BREAKING DOWN 'Socially Responsible Investment - SRI'

"Socially conscious" investing is growing into a widely-followed practice, as there are dozens of new funds and pooled investment vehicles available for retail investors. Mutual funds and ETFs provide an added advantage in that investors can gain exposure to multiple companies across many sectors with a single investment. Investors should read carefully through-fund prospectuses to determine the exact philosophies being employed by fund managers.

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