An expression that we hear more and more often: what is Impact Investing? How does it work? Let's analyse together this popular phenomenon in the finance of our times.
What is Impact Investing?
By imagining a glossary of the economics of sustainable development in line with the UN 2030 Agenda, we can define Impact Investing as the set of all investment activities towards subjects that operate with the specific objective of generating a social impact that is actually measurable and intentional and that are, at the same time, capable of generating a return or at least repaying the invested capital.
Impact Investing is a global phenomenon that refers to investments with an impact that must be intentional, measurable and additional to traditional investments. Even more simply, Impact Investing is realized through the convergence of investors' beliefs and values with the allocation of capital to solve or improve social and / or environmental issues.
Technically, Impact Investing can take place in all asset classes (private equity / venture capital, debt and fixed income) and it is implemented through the investment of capital in companies, non-profit organizations and funds in sectors that mainly operate in the field of renewables, regenerative construction, health, education, microfinance and sustainable agriculture.
There is a further differentiation within the concept of Impact Investing: it is defined as "finance first" in when the investors have primary objectives of market return, as well as social development. Instead, it is defined as "impact first" when the primary objective is that of social impact and the return objectives are below market expectations, with the limit of the constraint of the return of the invested capital over a medium/long time horizon period.
This is a constantly growing market, which according to data from the "Global Impact Investing Network" has grown significantly over time, reaching approximately the value of 715 billion dollars invested internationally in 2020 (source GIIN, Survey 2020).
How is Impact Investing implemented?
Imagining to concretely engage in Impact Investing, there are several tools available that refer to different asset classes. The investor who chooses to implement Impact Investing may decide, for example, to purchase shares in companies with a business that is expressly devoted to social and/or environmental progress. In the same you can buy shares of funds with the same vocation, whether they are public equity funds (listed on the stock exchange) or private equity (not listed on the stock exchange): the important thing is that their business is actively oriented towards a social impact.
Further possibilities are represented by investment in tangible assets such as real estate assets (social housing for example) or energy production plants/technologies from renewable sources.
While imaging investments in shares, the focus is mainly on green bonds and social bonds: they are bonds (and they work exactly like all bonds, i.e. the issuer undertakes to return the invested capital to the creditor within a set deadline, behind the periodic payment of a coupon representing an interest) but which, unlike standard bonds, have the constraint of investing the liquidity obtained in environmental (green bond) or social (social bond) businesses. Even in this case there are several examples: technologies that support energy saving and efficiency, sustainable mobility solutions, renewable energy production plants such as wind, photovoltaic or, recently, hydrogen, or the construction of housing solutions for fragile people, support for medical research campaigns, collaboration with training and education platforms are just some of the viable alternatives. In addition to bonds, there are Social Impact Bonds, a public-private partnership model that aims to raise capital from individuals to promote and finance public policies in the social and community welfare fields.
Among the tools of Impact Investing there are credit lines with facilitated financial conditions and which offer not only financial support to businesses that demonstrate an effective and measurable positive impact on the environment and/or society.
The areas of action where applying Impact Investing are several: we can also think, for example, to the projects for the reintegration of ex-prisoners, the care of early childhood and aged people, the solutions to avoid school dropout, accessibility solution for disabled people and to the enhancement of cultural heritage.
Impact Investing favours the spread and development of social entrepreneurship, thanks to the standards of financial and social transparency that it is imposed by definition.
Thinking about impact measurement, it must be monitored and accountable in a timely, clear and transparent manner. The starting point for defining the expected results are the 17 Sustainable Development Goals, from which to decline targets that can be measured through numerical KPIs and are objectively comparable. In fact, it is essential that investors are constantly updated on the status of their investment and on compliance with the established sustainable development goals.
The selected indicators, after being periodically measured and analysed, are summarized in an ESG impact report (Environmental, Social and Governance - the 3 principles of Sustainable Development), for the benefit of the transparency and objectivity of financial transactions.
