APPROACH
Our Impact Investment Thesis
As the problem’s societies face become more entrenched and complex, it’s clear that government and philanthropy can’t solve them on their own. A look at the amounts of capital this bears out - in the U.S. alone, philanthropy is approximately $390 billion, government spending is $3.9 trillion, and capital markets (all debt and equity investments) encompass $65 trillion. On a global scale, total investments are estimated at $300 trillion. Thus, a 1% shift in global capital markets towards impact investing–or investments that work toward social good–could cover the estimated outstanding $2.5 trillion annual funding gap to achieve the United Nations’ Sustainable Development Goals (SDGs). As this example shows, harnessing capital markets can have a huge societal benefit.
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Investment with return expectations
Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital. Impact investing comes with a specific intention and necessitates that investments be managed towards that intention. This includes having feedback loops in place and communicating performance information to support others in the investment chain to manage towards impact performance.
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Range of return expectations and asset classes
Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.
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Impact measurement
A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.
Investors’ approaches to impact measurement will vary based on their objectives and capacities, and the choice of what to measure usually reflects investor goals and, consequently, investor intention. In general, components of impact measurement best practices for impact investing include:
- Establishing and stating social and environmental objectives to relevant stakeholders
- Setting performance metrics/targets related to these objectives using standardized metrics wherever possible
- Monitoring and managing the performance of investees against these targets
- Reporting on social and environmental performance to relevant stakeholders
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Use evidence and impact data in investment design
Investments cannot be designed on hunches, and impact investing needs the proactive application of data analytic methods tools, and analytics combined with real-world evidence and data to drive intelligent investment design that will be useful in contributing to social and environmental benefits.