Impact investing has emerged as a powerful sustainability strategy that seeks financial returns while aiming to generate positive social and environmental impacts. This dual-purpose investment approach addresses pressing global challenges such as poverty, inequality, climate change, and access to essential services like healthcare and education.
The impact investing market has witnessed significant growth, reflecting a broader shift towards socially conscious investment strategies. Below we explore the methodologies for measuring the impact of these investments and highlight successful case studies that demonstrate the real-world benefits of impact investing.
Overview of impact investing
Impact investing refers to investments made with the intention of driving positive, measurable social and environmental impacts as well as a financial return. This investment approach directs capital towards projects, organisations, and initiatives that deliver both financial and social/environmental benefits.
The impact investing market has grown significantly in recent years. According to the Global Impact Investing Network (GIIN), the market was estimated at $715 billion in 2020. This growth is driven by increased awareness of global challenges and a desire among investors to contribute positively to society while achieving financial returns.
Examples of impact investing include providing small loans to entrepreneurs in developing countries to foster economic development and reduce poverty. Other examples could include funding projects that provide affordable housing solutions to low-income families or supporting renewable energy projects or initiatives.
Methodologies for measuring the impact of impact investing
Measuring the impact of impact investing is crucial to ensure that investments are delivering the intended social and environmental benefits. Below are some of the key methodologies used in this process.
Impact Reporting and Investment Standards (IRIS)
Developed by the Global Impact Investing Network (GIIN), IRIS provides a set of metrics for measuring and managing impact performance. IRIS metrics are used to evaluate various aspects of impact, such as social, environmental, and financial performance. These metrics are widely adopted by impact investors to ensure consistency and comparability across investments.
Social Return on Investment (SROI)
SROI is a framework for measuring and accounting for the value created by an investment in social, economic, and environmental terms. It involves identifying and valuing outcomes, comparing them to the investment made, and expressing this as a ratio. For example, a ratio of 3:1 indicates that for every dollar invested, three dollars of social value are created.
Global Reporting Initiative (GRI)
GRI provides a comprehensive set of standards for sustainability reporting, including economic, environmental, and social impacts. GRI standards help businesses and investors measure and communicate their impact on critical sustainability issues such as climate change, human rights, and governance.
Environmental, Social, and Governance (ESG) metrics
ESG metrics assess the environmental, social, and governance performance of investments. These metrics cover a wide range of factors, from ecological footprint and water usage to labour practices and board diversity. ESG metrics are used by investors to screen and evaluate the sustainability and ethical impact of their investments, helping to align financial returns with positive societal outcomes.
Impact Management Project (IMP)
The IMP provides a framework for assessing and managing impact performance across five dimensions: what, who, how much, contribution, and risk. This framework helps investors understand and communicate the impact of their investments in a structured and comparable way.
Examples of successful impact investments
LeapFrog Investments
LeapFrog Investments focuses on emerging markets and aims to reach underserved consumers by investing in financial services and healthcare. Their investments have impacted over 212 million people across 35 countries, providing financial inclusion and improved healthcare.
For instance, their investment in BIMA, a microinsurance company, expanded access to affordable insurance for low-income families. LeapFrog’s portfolio companies have grown revenue by an average of 30% annually, showcasing the financial viability of impact investments.
Acumen Fund
Acumen is a global venture capital fund that invests in companies, leaders, and ideas tackling poverty. They have invested in over 100 companies in Africa, Latin America, South Asia, and the United States, providing basic services to millions of low-income individuals.
Investments include D.light, a solar energy company that has provided affordable solar power to over 100 million people, significantly reducing reliance on kerosene and improving health and productivity.
BlueOrchard Finance
BlueOrchard is a leading impact investment manager dedicated to fostering inclusive and sustainable growth. Their investments have reached over 200 million people in more than 90 countries, primarily through microfinance institutions.
BlueOrchard’s investments have contributed to financial inclusion, helping micro-entrepreneurs and small businesses grow and thrive, particularly in underserved regions.
Conclusion – Future trends in impact investing
Successful impact investments have shown that it is possible to foster inclusive and sustainable growth while delivering attractive returns. However, it is pivotal to utilise methodologies to ensure the investments are having real-world benefits. Looking ahead, the future of impact investing is promising. Some trends we can expect in this space include the increased integration of advanced technologies.
