When investors direct their capital towards generating measurable, sustainable social impact, it is known as impact investing. The capital is directed towards firms and organizations with a cause of generating social, environmental impact besides profits.
Impact investing is directed toward environmental, infrastructure, and socially relevant sectors engaged in creating a sustainable impact in the regions of their operation. As the name suggests, the end motive of ‘impact investment’ is to drive ‘impact’ in priority sectors such as healthcare, education, creation and sustenance of livelihood, among others.
In most cases, the investees, on being able to receive investment in the initial phase or at the growth stage, exhibit substantial results and favorable economic returns.
The emergence of impact investment has led to the much-needed support to social enterprises, also helping investors realize and tap the potential of this new form of investing.
According to the Global Impact Investing Network (GIIN), “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”
GIIN also states the best practices for impact investing:
- Social and environmental objectives should be well established and communicated to relevant stakeholders.
- Setting performance metrics/targets related to the objectives.
- Monitoring and managing the performance of investees against these targets.
- Reporting on social and environmental performance to relevant stakeholders.
Example of Impact Investment
We’re going to cite an example of impact investment from the GIIN for a better understanding of the concept.
FMO, a dutch entrepreneurial development bank, invested EUR 26.7 million in Clean Energy (CE) in Mongolia to increase renewable energy use and access in emerging markets in Asia. FMO is known for its investments in sectors including food, water, and energy.
Clean Energy (CE) is a “special purpose vehicle designed to finance the construction of Mongolia’s first wind farm”.
Environmental metrics tracked on this investment included the number of carbon emissions avoided, the amount of water and coal saved.
The market of global impact investment is ever-expanding. Not only does it provide capital to address the world’s most pressing challenges but also exhibits a new avenue for investors to explore.
“Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investment should focus exclusively on achieving financial returns,” GIIN states in its report.
Therefore, impact investing showcases the many ways through which capital can be used to generate positive social, environmental impact along with procuring financial returns.
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