Social impact investing (SII) is an approach that targets capital towards business models and assets that are seeking to contribute to solutions to the world’s societal challenges, helping to build stronger communities and improve lives. Investments have the explicit expectation of a measurable social, as well as financial, return.
There are a growing number of institutions that make social impact investment. These include pension funds and large university endowments, charitable trusts and foundations, wealthy individuals and families and government. Each have different motivations and requirements: mission focus, financial return expectations, liquidity needs, and impact measurement and management expectations. The range of positive social outcomes that will often be determined by their mission and investment strategy, seeking the greatest opportunity set in target geographies or stakeholder groups that align with that mission and strategy.
How is social impact investing made?
There is no universal standard for assessing social impact investment, however the Sustainable Development Goals (SDGs) are often used, both by investors and product providers.
The investment vehicles that can be used to implement a social impact investment strategy are very varied. From direct investment in shares of companies with a profile in line with the values of the institution, to the use of funds or ETFs with specialized management. All of them have an orientation in line with social impact investing. In many of these products we will see the acronym SRI, which stands for Socially Responsible Investing.
Also, there are three common adopted strategies to invest: Carve out, creating an impact investment ‘carve’ out, often with its own financial return objectives that differs to the main portfolio objectives; Integrated impact strategies, Integrating impact investments as a portion of investments within an existing asset allocation where these investments contribute to the portfolio’s objectives; and 100% impact focus, applying an impact lens to 100% of an investment portfolio.
Investors can access impact investments directly or indirectly via funds and pooled investment vehicles. The different types of access to social impact investment are Debt, Equity, Hybrid models, Impact funds and pooled investment vehicles, Specialist impact investment products, Blended finance and Outcomes contracts.
The benefits of social impact investing
While these new approaches will not replace the core role of the public sector or the need for philanthropy, they can provide models for leveraging existing capital using market-based approaches with potential of societal impact. Social Impact Investment can provide new innovative ways to allocate public and private capital and address social and economic challenges at the global, national and local levels.
