Guide to impact investing

We guide you through everything you need to know before you embark on your impact investment journey. Featuring how impact investing works, how to get started, who’s doing it and more...

What is impact investing?

Impact investing requires moving your money into funds, projects or companies that aim to have positive social and environmental outcomes while at the same time providing a return on your investment.

The aim is to create value for you as an investor and the wider world at the same time. 

Impact investments span a broad range of sectors, asset classes and regions. It can include  microfinance, community share offerings or investments in some of the world’s biggest companies (which can lead to debates about the actual impact of some investments. This has become more of an issue as impact investment has become more mainstream.  More on this below).

Impact investors regularly monitor the performance of their assets against social and environmental goals, and there is often a big focus on transparency.

Impact investing offers those with money a different route to traditional philanthropic or charity giving, by providing capital to businesses that are trying to do the right thing.

Three key aspects distinguish impact investing from conventional investing:

  • Intentionality: the intention to exert a positive social or environmental impact; 
  • Additionality: funding a good cause that may not otherwise exist; 
  • Measurement: being accountable and transparent in reporting on the financial, social and environmental impact of investments.

Many different groups of people are using impact investments to change the world. 

  • Individual investors (consumers)
  • Financial institutions (such as banks or insurance companies)
  • Religious groups
  • Local councils
  • Companies and cooperatives who have retained assets

For investors, the benefit is that they get to know that their money is making a difference in the world by financing companies that are generally trying to do the right thing.

For companies that are doing the right thing, it provides access to more capital and gives them the ability to further their work. It could also give a competitive edge over others if finance becomes more easily available or at better terms.

coins on table

Impact Investing v ESG v SRI v Active Ownership

While Impact investing, ESG (environment, social and governance), SRI (socially responsible investment) and active ownership are different approaches, there is often overlap in the way that they assess the ethical credentials of investments.

ESG investing uses environmental, social, and governance (ESG) criteria to screen potential investments alongside traditional financial measures (which remains the main driver for such investments).

Socially responsible investing (SRI) sets certain conditions for social responsibility using ESG considerations (and others) and then invests in businesses that meet those standards. This could be using positive or negative screening.

Active ownership involves engaging with companies on ethical concerns that affect their long-term growth or pose a reputational, social or environmental risk. Using your power as a shareholder (or group of shareholders) can positively influence corporate behaviour. For more on this visit the ShareAction website. This campaign organisation helps consumers and larger investors engage with companies.

Impact investments focus on helping businesses that are doing something positive and are specifically designed to meet particular goals as discussed above. Impact investments also tend to take a much longer term view of the investment rather than looking for quick returns.

Impact investing explainer video by Nesta UK

How does impact investing work?

There are a few ways to approach impact investing, but in many ways it doesn’t differ to traditional forms of investing.

You’ll be choosing who to invest in, but rather than picking funds, institutions or projects based solely on potential financial returns, you’ll also be looking at the potential positive social and environmental impact of those investments. 

What do you want to have an impact on? You’ll need to decide what you want to have a positive impact on through your investment. For example you may want to help fight climate change or to tackle world hunger or even tax avoidance.

Next you’ll need to think about what companies might be doing that can help create that positive impact. Using the example of climate change, this could include companies involved in clean energy generation (for example a community wind farm) or sustainable transport.

Once you have your issue list, you can then look for companies or funds that work in the areas you are interested in. There are three basic ways to do this:

Speak to an ethical financial adviser who can point you in the right direction (always a good idea).

Find an ethical fund from a bank or investment platform. This means investing in a number of projects or companies that have been pre-screened by that bank or platform - so it is important to trust their criteria! 

Use a more DIY approach to find funds or individual projects or companies to invest in that match your ethics. This option is more for experienced investors and we always suggest speaking to a financial advisor. Our guide to innovative financial ISAs and ethical investments has ideas on where to look for individual projects that have social and/or environmental impact.

There are three main places you can find impact investment opportunities:

  1. Managed funds - on the investment company website e.g. Triodos funds
  2. Crowdfunding platforms - for example Energise Africa or Abundance
  3. Individual company stocks and shares using a stock market investment tool e.g. from Hargreaves Landsdown

Impact investing funds

The top five impact investing firms on the basis of assets under management are: 

GIIN published the 2020 Annual Impact Investor Survey. They estimate that over 1,720 organizations managed USD 715 billion in impact investing as of the end of 2019. 

In the UK, data from Big Society Capital has shown growth from £850m in 2011 to £5bn in 2019 with much of the growth coming from alternatives to traditional bank lending (from £169m in 2011 to £3.4bn in 2019).

The more established SRI method of investing, however, continues to be worth much more with some estimating $22 trillion in assets globally are now held in SRI funds.

How do impact investment funds perform financially?

Some impact investment funds intentionally invest knowing they’ll get lower returns than on traditional investments, because they’re more concerned with social or environmental goals than a financial return. According to a study by the Global Impact Investing Network (GIIN), impact investments have average returns of 5.8% which is below the average return of the S&P 500 (approximately 10%). 

However, many impact investments try to bring in returns that are competitive with the stock market and perform just as well. You can often view previous rates of return on an investment but these are not meant as an indication of future performance.

Concessionary and non-concessionary impact investing

Impact investments can be considered “concessionary” or “non-concessionary.” 

Concessionary impact investments, sometimes called “impact first,” are where investors prioritize the social impact and are willing to receive a lower return or take a higher risk on any investment.

Non-concessionary impact investments, sometimes called “finance first” or "double-bottom line,” are intended to generate returns equal to those of traditional investments while also having social or environmental impact.

A great example - Energise Africa

Energise Africa is an investment platform that lets UK consumers invest in clean energy projects across Africa, and score well in our guide to Innovative Finance ISAs.

Investments can start from £50 in individual projects that usually focus on providing solar power to homes across sub-saharan Africa. Each project can quantify exactly what the impact will be.

To date their projects have empowered 562k people across Africa to replace kerosene with clean solar electricity in their homes.

Energise say that their investors are “actively fighting climate change by enabling solar power to mitigate 123 thousand tonnes of CO2 every year.”

Each individual investor account also gives an indication as to the amount carbon saved from each investment providing full transparency about your impact.

Energise Africa are featured in our guide to innovative financial ISAs (look for the references to Ethex).

Is impact investing effective?

It can be difficult to quantify how much impact your investment may be having.

However, some investments do offer an insight into how your investment is performing.

How social and environmental impacts are measured

There is no one standard for doing measuring the impact of investments, and it relies heavily on those carrying out the assessment. Some companies use independent auditors to carry out impact assessments while some don’t, so it’s often difficult to compare the social impact of companies or funds.

Marilou van Golstein Brouwers of Triodos Asset Management wrote recently that,“When it comes to investing, simplicity, both in measuring and reporting financial results as well as impact is an illusion and we need to acknowledge that.”

Investors therefore need to be careful when choosing impact investments to have confidence that the investments really are having a positive impact. 

In general, components of impact measurement best practices include:

  • Stating the social and environmental objectives
  • Setting performance targets related to these objectives 
  • Monitoring and managing the performance against these targets
  • Reporting on that social and environmental performance

Impact investors should be wary of any company that cannot quantify its positive outcomes and / or is not transparent about them.

Trusting the ethical credentials of investment funds

It's important to trust the ethical credentials of the fund manager you choose, as well their criteria for screening companies for inclusion. For example, many mainstream impact fund managers and organisations try to align their impact goals and investment themes to those of the United Nations’ 17 Social Development Goals (UN SDGs). These are:

  • No poverty;
  • Zero hunger;
  • Good health and well-being;
  • Quality education;
  • Gender equality;
  • Clean water and sanitation;
  • Affordable and clean energy;
  • Decent work and economic growth;
  • Industry, innovation and infrastructure;
  • Reduced inequalities;
  • Sustainable cities and communities;
  • Responsible consumption and production;
  • Climate action;
  • Life below water;
  • Life on land;
  • Peace, justice and strong institutions, and
  • Partnership for the goals.

However using this approach can often prove problematic, and is especially a concern when it comes to investments in larger companies or in mixed ‘off the shelf’ funds. 

Clemence Chatelin uses the following example in her article for What Investment:

Some fund managers would hold a company such as Procter & Gamble. This is because ca. 50% of their revenue is generated through the sale of sanitation products, therefore it is helping towards the SDG 6 ‘Clean Water and Sanitation’. 

However, any inquisitive person would also point out that P&G are responsible for much of the plastic and nappies (with a 57% market share for nappies!) we find in landfills and in our seas. 

Labelling P&G as a company with a positive impact can seem a little farfetched to some. Others would argue that a company such as P&G is an excellent company to hold because there is a lot of scope for shareholder activism and engagement to turn the company around to be more sustainable.”