Impact investing is an extension of socially responsible investing (SRI), which focuses on companies that promote ethical and socially responsible consciousness, such as environmental sustainability, social justice, and corporate ethics. Impact investing goes a step further by actively seeking investments that can create a significant, positive impact.
Impact investing focuses on investing in companies or organizations to create a measurable societal benefit, while still generating a favorable financial return. Impact investing is typically centered around addressing a social issue, such as poverty or education, or an environmental issue, such as clean water.
As of publication, the top five impact investing firms on the basis of assets under management (AUM) are Vital Capital, Triodos Investment Management, the Reinvestment Fund, BlueOrchard Finance S.A., and the Community Reinvestment Fund, USA.
Key Takeaways
- Impact investing involves seeking investments in companies that can generate a positive social impact.
- Popular issues to target include environmental damage, poverty, and education.
- Financial return is still a goal.
- Some of the top impact investing funds have more than $4 billion in assets under management.
Important
The U.S. Department of Labor (DOL) released a new regulation in late October 2020 that may limit or eliminate socially responsible investing (SRI) in retirement plans. In November 2022, the DOL announced a final rule that permits plan fiduciaries to consider climate change and other ESG factors when selecting retirement investments.
Vital Capital
Vital Capital is a private equity fund with approximately $350 million in assets. The fund invests in developing areas, principally sub-Saharan Africa, in businesses and projects designed to enhance quality of life and offer substantial investment returns.
The primary investment focus of Vital Capital is on the development of infrastructure, housing projects, agro-industrial projects, renewable energy, healthcare, and education. Among the fund’s investments are the Luanda Medical Center in Angola and WaterHealth International.
Triodos Investment Management
Triodos Investment Management is a subsidiary of Triodos Bank, headquartered in the Netherlands, which manages more than a dozen sustainable investment funds. Triodos has been actively engaged in impact investing since 1995 and as of publication has approximately $5 billion in assets.
Primary areas of interest include renewable energy, sustainable food and agriculture (including organic farming), healthcare, and education. Also, Triodos is one of the founding members of the Global Impact Investing Network. Its investments are spread throughout Europe, South America, Africa, India, and Southeast Asia.
Reinvestment Fund
The Reinvestment Fund, headquartered in Philadelphia, is a nonprofit community development financial institution. With an estimated $1.2 billion in assets under management as of publication, the fund finances housing projects, access to healthcare, educational programs, and job initiatives.
The Reinvestment Fund operates primarily by assisting distressed towns and communities in the United States. It also provides U.S. cities with public policy advice and data analysis services to assist in developing community programs.
BlueOrchard Finance S.A.
BlueOrchard Finance, with principal offices in Switzerland, operates in more than 80 emerging and frontier markets around the world, including areas in Asia, Latin America, Africa, and Eastern Europe. Created as part of a United Nations initiative in 2001, BlueOrchard Finance was established as the first commercial manager of microfinance debt investment worldwide.
As of publication, BlueOrchard has invested in more than 200 million entrepreneurs around the globe. It provides both debt and equity financing to businesses and institutions, with an emphasis on alleviating hunger and poverty, fostering entrepreneurship, establishing food production and education programs, and working on climate change issues. BlueOrchard Finance has approximately $3.5 billion in assets under management.
Community Reinvestment Fund, USA
The Community Reinvestment Fund, USA was founded in 1988 in Minneapolis as a national nonprofit certified community development financial institution. Its mission is to empower people to improve their lives and their communities.
The Community Reinvestment Fund partners with local private lenders to provide financing capital for community development projects. These include small business loans for the purpose of growing a business, expanding staff, or increasing energy efficiency. But with more than $250 million in assets, along with access to additional long-term loan capital through the U.S. government’s Community Development Financial Institutions Bond Guarantee Program, the Community Reinvestment Fund also provides funding assistance for community housing projects, healthcare centers, charter schools, daycare centers, and small businesses.
What is the difference between impact and ESG investing?
Impact investing and ESG investing are similar, but have a key difference. While ESG investors aim to invest in companies that meet specific environmental, social, or governance requirements, impact investing goes further, considering ESG factors while also trying to use their funds to produce specific social impacts.
Put another way, all impact investments are ESG investments, but not all ESG investments are impact investments.
Does impact investing work?
It's difficult to measure the social change brought about by impact investing. It's proponents argue that it is highly effective and can help push even companies that don't receive investment to change their actions to better reflect ESG standards while detractors argue that the impacts are negligible.
Does impact investing impact financial returns?
ESG and impact investing are still relatively new, but interest in how they impact returns is high. According to research from Charles Schwab, ESG funds have middle-of-the-pack performance compared to similar funds, which may indicate that ESG and impact investing does not have a significant impact on returns.
The Bottom Line
Impact investing firms put their money where their mouth is, aiming to earn a financial return while working to remedy a social ill. Investing with this type of strategy is popular with many people who want to make a difference in the world and, some argue, could help produce stronger returns in the long run.
As an expert in impact investing and socially responsible investing (SRI), I can provide a comprehensive understanding of the concepts and key players in this field. My extensive knowledge is backed by a deep understanding of the principles, trends, and regulatory developments in impact investing. Let's delve into the article's key concepts:
1. Socially Responsible Investing (SRI):
- SRI focuses on companies that promote ethical and socially responsible consciousness.
- Emphasis on environmental sustainability, social justice, and corporate ethics.
2. Impact Investing:
- An extension of SRI that actively seeks investments with a significant, positive impact.
- Aims to create measurable societal benefits while generating a favorable financial return.
- Focus areas include social issues (e.g., poverty, education) and environmental issues (e.g., clean water).
3. Top Impact Investing Firms:
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Vital Capital:
- Private equity fund with approximately $350 million in assets.
- Invests in developing areas, particularly sub-Saharan Africa.
- Focus areas: infrastructure, housing projects, agro-industrial projects, renewable energy, healthcare, and education.
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Triodos Investment Management:
- A subsidiary of Triodos Bank with around $5 billion in assets.
- Engaged in impact investing since 1995.
- Primary areas of interest: renewable energy, sustainable food and agriculture, healthcare, and education.
- Founding member of the Global Impact Investing Network.
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Reinvestment Fund:
- Nonprofit community development financial institution.
- Approximately $1.2 billion in assets.
- Focuses on financing housing projects, healthcare access, educational programs, and job initiatives in distressed U.S. communities.
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BlueOrchard Finance S.A.:
- Operates globally, including in over 80 emerging and frontier markets.
- Established in 2001 as the first commercial manager of microfinance debt investment.
- Emphasis on alleviating hunger and poverty, fostering entrepreneurship, food production, education programs, and climate change.
- Around $3.5 billion in assets.
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Community Reinvestment Fund, USA:
- Founded in 1988 as a national nonprofit certified community development financial institution.
- Mission: empower people to improve their lives and communities.
- Provides financing capital for community development projects, including small business loans, community housing projects, healthcare centers, charter schools, daycare centers, and small businesses.
- More than $250 million in assets.
4. U.S. Department of Labor (DOL) Regulations:
- October 2020: New regulation potentially limiting or eliminating SRI in retirement plans.
- November 2022: DOL announces a final rule allowing plan fiduciaries to consider climate change and other Environmental, Social, and Governance (ESG) factors when selecting retirement investments.
5. Impact vs. ESG Investing:
- Difference:
- ESG investing aims to meet specific environmental, social, or governance requirements.
- Impact investing goes further, seeking specific social impacts while considering ESG factors.
- All impact investments are ESG investments, but not all ESG investments are impact investments.
6. Impact on Financial Returns:
- Difficulty in measuring the social change brought about by impact investing.
- Proponents argue effectiveness in pushing companies towards ESG standards.
- Detractors argue negligible impacts.
- Research suggests ESG funds have middle-of-the-pack performance compared to similar funds, indicating potential limited impact on returns.
7. Bottom Line:
- Impact investing firms aim for a financial return while addressing social issues.
- Attractive to those wanting to make a positive impact and potentially contributing to stronger long-term returns.
