Disclaimer : This blog is originally written for the internal blog in University of Edinburgh Business School
Impact investment is defined as investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. Recently many institutional investors are incorporating an impact investment strategy to their portfolio. Impact investments are gaining much interest among large investors especially after the last economic breakdown.
Major investors in impact investment are High net worth individuals(HNI), Foundations, family offices and so on. As per the report by JP Morgan there is an increasing interest among investors in impact investments. As per the study, 2013 saw an increase of more than 12% in investments in different asset classes which comes within impact investment. A major portion of the funds are invested in sustainability projects with social impact, which includes manufacturing and distribution of solar lighting and power products to those without access to reliable electricity and thereby transforming lives in the developing world. In 2014 J.P. Morgan and the Global Impact Investing Network studied 125 major fund managers, foundations, and development finance institutions and found $46 Billion is being invested in sustainability projects which is a 20% increase from the previous year.
Debt Financing in Impact Investment
With the growth of investments towards social impact projects, governments and corporates have started issuing bonds to finance such projects. Two examples are given below
- New York State, Social Finance and Bank of America Merrill Lynch teamed up to launch a social impact bond to reduce recidivism. They raised $13.5 million.
- IIX Asia, a very innovative platform for impact investment based in Singapore is planning to launch a Women’s Livelihood Bond which will be focusing on women’s development in South-East Asia. They are planning to raise $ 20 million in the first issue. The bonds will be listed on Impact Exchange, worlds first Social stock exchange.
Future of Impact Investment
Studies show a steady growth in social and sustainability Impact investments around the globe. There are predictions that the whole impact investment market will grow to 3 trillion dollars by 2020.
With the growth in impact investments, philanthropy is moving from not-for-profit to for-profit initiative. Sustainability of funding for social causes will be achieved only by making it a for-profit initiative rather than a not-for-profit or donation.
When Venture Capital market exploded in 1980, it changed the industry. Lot of products and services came into the market and it eventually changed the life of everyone. Many people see Impact investments as something which has the potential to bring in change in businesses as Venture capital did in the 1980s.
Impact investment has the potential to bring in the next big change in Entrepreneurship, the society and the life of millions of people.