Impact investing uses environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns AND positive societal impacts.
Returning competitive financial returns to stockholders has been a central tenet and organizing principle of business since long before the days of Milton Friedman, who was known to have argued: “a corporation’s responsibility is to make as much money for the shareholders as possible.”
Unfortunately, this approach stripped the environment of vital resources, limited workers rights and created the conditions by which supranational corporations could become “too big to fail” and “too brazen to be restrained”.
Impact investing means different things to different people. However, whether these projects are referred to as: “community investing,” “ethical investing,” “green investing,” “impact investing,” “mission-related investing,” “responsible investing,” “socially responsible investing,” “sustainable investing” or “values-based investing,” they are all organized to create real world results which benefit not only shareholders but also the wider constellations of stakeholders connected to the business cycle.
Stakeholders include businesses, their employees, suppliers, customers, government bodies and the local environments they operate in. Corporate social responsibility (CSR) has emerged as a key organizing principle guiding the new start-up ecosystem and investment landscape.
While not all CSR activities would be classified as impact investing, the most transformative projects are and deserve to be recognized.
As governments, businesses and society are able to pursue shared goals within philosophical frameworks such as those driving impact investing and corporate social responsibility, opportunity is more equitably levied across our world.
Types of Impact Investment Products
Cash/Cash Equivalents: Investments of cash assets (such as certificates of deposit, savings accounts, and money market accounts) into community banks and local financial institutions that make investments towards organizations and projects dedicated to pursuing socially and or environmentally beneficial impacts.
Fixed Income: Bonds with maturities ranging from short term (less than one year) to long term (five to more than 30 years) issued by governments, corporations or financial institutions that result in capital flow to social enterprises or projects that address social or environmental challenges.
Investment Funds (Private Equity and Venture Capital): Investments made into third-party managed funds that make debt and equity investments into organizations and projects seeking to make tangible nonfinancial impact on social and environmental issues.
Public Equities: Investments made into impact enterprises, projects and social businesses that are publicly traded.
Real Estate: Investments made into sustainably managed properties, or properties currently in development or among low-income populations, and in which social and environmental objectives are intentionally sought, such as sustainable growth, green buildings, urban regeneration, and affordable housing.
Infrastructure: Investments into the facilities and structures required for the effective operation of an economy and society, usually involving the provision of essential physical structures and services to support populations at the bottom of the economic pyramid.
Other Real Assets: Identifiable and tangible assets, whose value is derived from physical properties, managed to produce long-term value to society and the environment, as assets are not depleted or damaged, such as land trusts, agricultural spaces and recreational spaces.
Social Impact Bonds: Social Impact Bonds (SIBs) are pay for success contracts between private investors and socially beneficial programs. Financial returns are offered based on the success of the program in question. SIBs are gaining in popularity as a means of translating socially desirable goals into measurable economic returns.
Revolutionary Ideas for Enlightening Times
Over the last 20 years, impact investing has gained prominence as a means to generate significant social and environmental benefits and sustainable financial returns. This movement may have been spearheaded by community organizations, advocacy groups, non profit foundations and philanthropists but has rapidly expanded.
Corporate social responsibility is a movement leading businesses to reconsider how they collect natural resources, produce goods and treat the human capital essential to their means of production. Accountability to all stakeholders connected to the business cycle is translating into long term gains in reputation, profitability and brand primacy for the companies that are getting the most out of their CSR projects.
As businesses, governments and communities work in tandem they are driving improvements in human welfare and sustainable development which are making our world a better place for the 7.6 billion citizens of Planet Earth.
According to the United Nations Development Project, the Global Impact Investing Network (GIIN) estimates a growing market of US$114 billion in impact investing assets, of which more than US$22.1 billion was allocated in 2016. In 2017, that number was projected to rise by 25.9 percent.
While the national and international supply of impact investment capital is expected to rise, currently, impact investment’s total share in global financial markets is estimated to be only 0.2 percent of global wealth.
If this share were to rise to just 2 percent, it would mean over US $2 trillion invested in impact-driven assets. Larger definitions of sustainable or responsible investment(including ESG compliance and managers applying investment exclusion lists) encompass an estimated total of US$21.4 trillion.
Finally, more than 1,500 asset managers, with combined assets of over US$62 trillion, have signed on to uphold the United Nations Principles for Responsible Investment. The United Nations estimates that reaching the Sustainable Development Goals in developing countries will cost about $3.9 trillion per year—and that private and public sources provide just $1.4 trillion.
The New Start-Up Ecosystem
Social enterprises have emerged as the logical continuation of impact investing and corporate social responsibility activities. These new and hybrid forms of business refer to commercial projects that address specific social and environmental needs.
Often, these projects and companies are dedicated to seeking innovative solutions to issues humanity has long struggled to reconcile. In this way, they are able to recoup resources spent researching and developing with profits derived from commercial sales of products.
Today, businesses of all shapes and sizes could be described as social enterprises. The term is expansive enough to include businesses that are extremely responsive to the needs of their employees while also describing a not for profit endeavor organized to raise awareness about a behavioral change such as improving nutrition.
The main types of social enterprises are: entrepreneurial nonprofit, nonprofit, socially responsible business, give one, get one & and donate a portion of proceeds, conscious company, conscious brand as well as other businesses which outside of these areas has built social responsiveness into their business model.
Social enterprises have impact investing and corporate social responsibility baked into their frameworks as central drivers of their success and unique value propositions. Customers are responding favorably and continue to show increased interests in choosing the support companies which better align with their personal values and ethics.
The new start-up ecosystem is being driven by social enterprises which are choosing to ask not just how they can offer returns to their shareholders but how to leverage their expertise to help make the world a better place.
XPO²: Fundraising Disrupted
By 2023, XPO², our fundraising, marketing and ecommerce platform will support over 10,000 high value social enterprises to protect the natural environment, strengthen communities, and transform what’s possible for the 7.6 billion people of Planet Earth.
The size of our ambition can only be matched by the passion of our perspective: by supporting worthy organizations committed to achieving the highest net social impact, we are making the world a better place.