Impact investing is a special type of capital investment where the investor is not only interested in earning revenue but also bring about a social or environmental change in a perceivable manner. Impact investing can be done in all kinds of markets, be it developed or emerging. Impact investment helps in addressing some of the critical global issues such as climate change, agriculture, poverty, sustainable development, clean power, micro-financing, and healthcare among others.
There are four main aspects to Impact investing- the intention of the investor, the expected returns, the range of returns and asset classes, and the measurement of the impact. A brief overview of each of these aspects is mentioned below:
- The intention of the investor- This refers to a clearly defined set of goals for bringing about social and environmental changes from the side of the investor.
- Expected returns- The investor should specify the expected financial returns on capital or the return of the capital itself.
- The range of returns and asset classes- The returns of impact investment are often targeted at below the market value or at risk-adjusted market value. The returns can be made in the form of multiple asset classes such as cash equivalents, fixed income, private equity, and venture capital.
- Impact measurement- Transparency and accountability are of prime importance in impact investment. The investor must have clear intention and parameters for measuring the impacts and changes brought about by the investment.
The approach of investors is heavily dependent on their goals and their expectations. Their choice of measurement is also affected by this. Some of the best practices for measurement of impact investment are as follows:
- Communicating the relevant social and environmental goals to all the stakeholders and involved parties.
- Setting the right metrics for productivity and setting specific goals or standards that are to be met.
- Continuous monitoring of the performance of investees based on the set standards.
- Timely reporting of the various changes brought about.
The measurement of impact
The measurement of the actual impact from impact investment has four main phases to it.
- Estimating impact– This involves the investor carrying out analysis and due diligence on the possible social and environmental change before investing.
- Planning impact– This involves selecting the right metrics and datasets for the given investment scenario.
- Monitoring impact– Once the investment has been made and the program has been initiated, both the investors and investees analyzing the changes as and when they are generated. Incremental but continuous development is the key here.
- Evaluating impact– The final step involves taking all the data and observations and finalizing the impacts brought about by the investment. This is an assessment of the portfolio after the investment has been closed, and helps the investor in taking further steps which can include re-investment based on the final results.
Surveys form the backbone of impact investment as they are the most reliable means of collecting data for understanding opportunities of social change. Added to this, a proper incentive structure needs to be created along with an investment plan for the program to succeed.