Explainer: What is Impact Investing
While Impact Investing in Canada has been steadily growing over the past decade, many investors still have questions about the strategy, wondering what impact investing is or how it is different from ESG or responsible investing. We hope this explainer helps. Please contact us if you wish to discuss further.
Impact investing is simply investing with the intention to generate measurable positive social and environmental impact alongside a financial return. (as described by the Global Impact Investing Network, GIIN)
All investments have an impact
All investments have an impact, whether positive or negative, whether intentional or not. An impact investing approach enables you to be intentional about that impact, to align your investments with your values, whether as an individual or an institution. It’s an effective strategy to support positive change.
Impact investing is a responsible investing approach
Traditional investing seeks to maximize return, without consideration of environmental, social and governance (ESG) factors or the positive or negative impact of those investments.
Responsible investing incorporates ESG into the selection and management of investments. Responsible investing is a broad term and asset managers use many approaches to be responsible (see graph below), such as screening – using negative screening to eliminate potential investments or positive screening to find potential investments – and shareholder engagement. (The term sustainable investing is sometimes used interchangeably with responsible investing.)
Impact investing is commonly considered one of those responsible investing approaches. The Responsible Investment Association conceives of impact investing this way and we choose to align ourselves with them, as common language helps investor understanding. While screening on the basis of ESG factors is a core component of impact investing, impact investing as a strategy does much more than just consider ESG factors.
Intention and measurement are key to impact investing
Impact investments have four key elements:
- Intentionality. Impact investments intentionally contribute to social and environmental solutions. This differentiates them from other strategies such as ESG investing
- Financial returns. Impact investments seek a financial return on capital that can range from below market rate to risk-adjusted market rate
- Range of asset classes. Impact investments can be made across asset classes
- Impact measurement. A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance of underlying investments
Measuring impact is what differentiates impact investing from other responsible investing approaches.
In this short video our CIO Marc Foran explains the difference between ESG investing and impact investing.
Impact investing is not philanthropy
Many philanthropic organizations in Canada are impact investors. Foundations, charities, university endowments and more are using impact investing to complement their philanthropy. Foundations have told us they are motivated to impact invest in order to:
- Commit more capital to their mission
- Align their money with their values
- Support new solutions to old problems
- Manage for risk and return through diversification
- Engage donors and trustees
While impact investing and philanthropy both share an aim of creating public good, investing is not philanthropic because it includes securing a financial return.
Indeed, impact investing can achieve market rates of return or better over the long term. As this pie chart shows, in the recent GIIN 2020 annual survey, most impact investors said they are aiming for market-rate returns… and 88% said that the financial returns they were getting were in line or above expectations.
Impact Investing in Canada
Surveys show that investors of all ages are interested in impact investing and that the field is growing, with the AUM estimated at $20 billion in Canada, according to the RIA’s 2020 Canadian Responsible Investment Trends Report, and $1.2 trillion US globally, according to the GIIN.