Updated: Aug 10, 2020
Impact investing refers to investments "made into companies, organizations, or funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return." Impact investments provide charitable capital to address social and/or environmental issues.
Impact investors actively seek to place capital in businesses, nonprofits, and funds in industries such as renewable energy, basic services including housing, healthcare, and education, micro-finance, and sustainable agriculture. Institutional investors, most notably from North American and European development finance institutions, pension funds and endowments have played a leading role in the development of impact investing.
Impact investing occurs across asset classes; for example, private equity/venture capital, debt, and fixed income. Impact investments can be made in either emerging or developed markets, and depending on the goals of the investors, can "target a range of returns from below-market to above-market rates".
Impact investing is often referred to as socially responsible investing (SRI), but while the definition of socially responsible investing focuses on the avoidance of harm, impact investing actively seeks to make a positive social impact by investing, for example, in companies that benefit the community or in clean technology enterprises.
Impact Investing covers several different types of investment options, but for understanding purposes they can be broken down into two primary groups; Passive Charitable Investment Options and Active Charitable Investment Options.
PASSIVE INVESTMENT OPTIONS: (The “feel good” investments - investors feel good about their investment even if the investment return is a little less than market rate)
SOCIALLY RESPONSIBLE INVESTMENTS – Investments that do no harm and focus on securing investment pools that do not invest in tobacco, alcohol, pornography etc. These funds express some level of concern for society but do not necessary promote a social impact.
MISSION RELATED INVESTMENTS – These investments may produce slightly below market rates because they support and do not jeopardize the furtherance of the private foundation’s charitable purposes. The focus is primarily on return, low risk and liquidity with some alignment with the foundation’s charitable purpose. Investments are usually in larger companies or mutual funds that have some social impact but the social impact is not the primary purpose of the investment, financial return is still the major purpose. Little monitoring by the Foundation is done of the investment for either business or social impact.
PROGRAM RELATED INVESTMENTS – These are now allowable under private foundation rules for investments, the primary purpose of which is to accomplish one or more of the purposes
described in section 170(c)(2)(B), and no significant purpose of which is the production of income or the appreciation of property. Focus is on the charitable purpose of the investment, and though
return is important, it is secondary to the charitable purpose of the business or businesses. Charitable impact does not need to be measured and reported, just recognized.
ACTIVE INVESTMENT OPTIONS: (The doing good investments – investors are more concerned with the actual social impact of the business receiving the investment, even if it never makes a profit)
SOCIAL IMPACT POOLED INVESTMENT – A mutual fund of investments in several different businesses where the stability and success of the underlying businesses along with charitable purpose is the primary objective. Return is expected but is secondary to the social impact. Each business involved will have a significant charitable purpose that is being addressed, measured and reported. The Fund Investment Advisor is responsible for choosing and monitoring the companies involved from both a due diligence and social impact concern and return is also expected for the fund and is also responsible for ongoing due diligence on the companies in the fund and monitoring the social impact. Focus is on successful businesses in the third world that also accomplish significant social impact. Reporting includes both measuring and achievements of the charitable impact as well as the financial success of the companies and the return on investment.
DONOR DIRECTED INVESTMENT – The donor has established a Donor Advised Fund and has identified a business that is dedicated to charitable purposes in which he or she would like to invest. The Foundation does due diligence on the business and confirms that the charitable purposes are in alignment with one or more of the Foundation’s eight charitable purposes and then directs money from the Donor Advised Fund to the business as either a loan, charitable gift or an equity investment. Donor may be responsible for monitoring the business and reporting the social impact back to the Foundation or the Foundation will set up reporting mechanisms from the company to ensure that charitable objectives are still primary and progress is being made. The Foundation’s primary concern is the social impact not the financial return.
BUSINESS/MINISTRY PARTNERSHIP INVESTMENTS - Business/Ministry Partnerships pair a successful ministry with a new or existing business opportunity by making investment capital available to the business, usually from a third-party funding source, that shares the ministry’s primary charitable purpose. As an investor in the business, the third-party investor can require that the business adopt a new purpose to help or facilitate the ministry objectives in some significant way.
The third-party charitable investor looks for businesses in a designated city area where investment capital is needed to help the business move to the next level and where the business managers and the third-party investor share a common commitment of faith. The third-party investor will typically take an equity position in the business as opposed to a creditor position. Business managers and ministry leaders are then paired together to determine how the business can best facilitate the ministry and how the ministry can help facilitate the business. When several ministry partnerships are established in an area, the third-party charitable investor will also link the business and ministry leaders together to promote a stronger community of faith that enhances and encourages the outreach of the faith community in the designated city area. Profits from the business that are due to the investor are typically split between the investor and the paired ministry or are used to expand the faith community’s outreach. Equity investments in the business/ministry partnerships will typically range from $10,000-$100,000, which is the hardest money to get for companies in the third world, where bank loans are difficult, expensive or not available and venture capital is nonexistent.