Understanding the World of Impact Investing

By Tom Mitchell

In a world facing challenges related to a changing climate and stark social inequalities, the concept of impact investing is compelling, powerful and frequently misunderstood. As a field of practice, impact investing builds on the long history of social investing and is rapidly evolving with an infusion of new ideas and participants.

In a world facing challenges related to a changing climate and stark social inequalities, the concept of impact investing is compelling, powerful and frequently misunderstood. As a field of practice, impact investing builds on the long history of social investing and is rapidly evolving with an infusion of new ideas and participants.

Evidence of investor demand abounds. It’s estimated that the total of U.S. assets under management employing some degree of social and environmental considerations is $6.6 trillion, as of 2014.1 The trends among high-net-worth individuals (HNWIs) are robust, with a recent global survey estimating that over 40 percent of HNWIs under 40 years old have portfolios that integrate social and environmental criteria, with 64 percent expected to increase their allocation in the next two years.2

Sophisticated investors are pursuing impact strategies. A growing number of foundations are exploring impact investing as a means for optimizing and harmonizing their capital—intellectual, financial and philanthropic—in service of their missions. Some family offices are funding enterprises and technologies that offer benefits to society and are building teams or seeding funds to execute these strategies. Global leaders, from the Pope to the President of the United States, invoke impact investing as a means of combating climate change and poverty; fostering social justice; and cultivating inclusive economies.

Infrastructure

While expectations and trends are positive, impact investing infrastructure is still a work in progress.

The industry of providing data regarding impact investing is maturing, and organizations like the Sustainability Accounting Standards Board are advancing efforts for the reporting of financially material social and environmental factors, but investors have an almost unquenchable thirst for data, and the need for greater disclosure from companies is high.

Large asset managers and banks are forging into impact investing seeking business growth, with many of their strategies and platforms still being nascent. The amount of compelling investment opportunities is growing, but it takes time to build track records. Many advisors are developing some capacity to engage with the market and service impact investors, but the degree of depth and skill varies widely.

For those responsible for portfolio execution and oversight, impact investing can introduce new tools for risk management, different frameworks for assessing the quality of an asset and an increased time commitment for learning and reflection. It doesn’t, as some skeptics believe, lead to the abandonment of rigorous standards.