Impact investing is a kind of socially responsible investment (SRI) that prioritizes firms with ethical values including sustainability, social justice, and corporate ethics. effect investing takes a step further by actively pursuing assets that will have a big, beneficial effect.1
Impact investing focuses on investing in firms or organizations that may provide a verifiable social benefit while still providing a good financial return. Impact investment is usually focused on tackling a social problem, such as poverty or education, or an environmental concern, like clean water.
As of publishing, the top five impact investing businesses in terms of assets under management (AUM) are Vital Capital, Triodos Investment Management, the Reinvestment Fund, BlueOrchard Finance S.A., and the Community Reinvestment Fund, USA.
Vital Capital
Vital Capital is a private equity firm with over $350 million in assets. The fund invests in companies and projects in poor countries, mostly in Sub-Saharan Africa, with the goal of improving quality of life and generating significant profits.23
Vital Capital invests primarily in infrastructure, housing developments, agro-industrial enterprises, renewable energy, healthcare, and education. The fund's investments include the Luanda Medical Center in Angola and Water Health International.
Triodos Investment Management
Triodos Investment Management, a subsidiary of Triodos Bank based in the Netherlands, runs over 12 sustainable investment funds. Triodos has been actively involved in impact investing since 1995 and now has around $5 billion in assets.56
Renewable energy, sustainable food and agriculture (including organic farming), healthcare, and education are among the most popular topics.7Additionally, Triodos is a founding member of the Global Impact Investing Network.8Its investments extend 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.9
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.10 BlueOrchard Finance has approximately $3.5 billion in assets under management.11
Community Reinvestment Fund, USA
Founded in 1988 in Minneapolis, the Community Reinvestment Fund, USA is a recognized nationwide nonprofit community development financial institution. Its purpose is to enable individuals to better themselves and their communities.
The Community Reinvestment Fund works with local private lenders to offer funding for community development initiatives. Small company loans might be used to expand, hire new employees, or improve energy efficiency.12The Community Reinvestment Fund, with over $250 million in assets and access to long-term loan capital through the U.S. government's Community Development Financial Institutions Bond Guarantee Program, offers funding assistance for various projects such as housing, healthcare, charter schools, daycare, 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.13
The Bottom Line
Companies who engage in impact investing put their money where their mouth is, with the objective of achieving a financial return while also trying to address a social problem. There are a lot of individuals who are interested in making a difference in the world, and making investments using this kind of technique is popular among them. Some people think that it might help yield greater profits in the long term.