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Roots and reach of impact investing

This article is part of
Guide to impact investing

Roots and reach of impact investing

Impact investing has been described as the “next evolution of responsible investing”.

This is the belief of Bertrand Gacon, head of impact investing and socially responsible investment for Lombard Odier.

He describes impact investing as: “An investment approach with the twin objectives of generating a financial return and bringing positive solutions to concrete environmental and social issues.

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“It is the next evolution of responsible investing.”

But if you’re thinking “Ten years ago, this term didn’t even exist”, you would be right. Its provenance has been ascribed to Antony Bugg-Levine, chief executive of the Nonprofit Finance Fund (NFF).

Mr Bugg-Levine had formerly been managing director at the Rockefeller Foundation and during a meeting in 2007, the phrase ‘impact investing’ was coined.

According to the Global Impact Investing Network (Giin): “Impact investments are investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.”

Impact investments do not screen out certain ‘unethical’ stocks, such as tobacco or arms manufacturers.

Instead, Mr Gacon says: “Investors mobilise their capital to invest in the world’s most effective social businesses”.

For example, the NFF has now helped dozens of social and community enterprises, as well as delivering returns to philanthropic investors.

Pay for Success/Social Impact Bond Initiative

In 2010, the US introduced the Pay for Success (PFS) initiative, followed closely by the UK.

The UK was the first to launch a project, in 2010, and the US saw its first project launch in 2012 - and the US has been quicker to develop new projects over the years.

By early 2016, 10 projects have launched, one project has completed, and there are more than 50 projects in development across the US.

In a Pay for Success deal, private investors pay for preventative or interventional social services up front.

If these services deliver their intended results, governments reimburse the investors with a return on their investment, while saving money on what they otherwise would have spent.

For example, programmes can include getting young people into work, or preventing recidivism among people leaving prison.

Source: NFF/PFS

Difference

But what makes impact investing different to investing in any entrepreneurial business? Why bother considering impact investing instead of, say, investing generally in small start-ups?

Jon Hale, head of sustainability research for Morningstar, comments: “Impact investing is often used to refer to targeted investments in private equity or bonds that help finance companies or projects designed to generate social and/or environmental good.

“But the use of the term has started to broaden into a more general description of the purpose behind sustainable and responsible investing.

“Rather than simply wanting to align their investments with their values, sustainable/responsible investors want their investments to make a difference in the world.”