15/10/2020

What is impact investing?

Just as Australians are increasingly considering ethical and sustainable factors relating to what they buy, they too are increasingly concerned about what they invest their money in and whether such investments are purposeful and sustainable.

While conventional investing is typically undertaken with the intent of simply receiving a financial return, impact investing is undertaken for a dual purpose – to both receive a financial return and generate positive, measurable social and/or environmental impacts.

Environmental impact initiatives, as the term suggests, aim to benefit the environment, such as through the use of renewable energy, clean technology, climate change mitigation, land conservation, biodiversity conservation, green buildings, water resource management and ocean conservation.

Social impact initiatives aim to mitigate or relieve social issues, such as by providing early childhood education, employment training, affordable housing, mental health and wellbeing services, health and disability services and services aimed at increasing social inclusion.

A key to impact investing is the intention to create social or environmental impact. This differs to ethical investment or responsible investment, which generally seek to avoid any negative impact but do not necessary seek to create positive impact.

The emergence of impact investing demonstrates that society is no longer accepting of companies solely prioritising profits, especially when such priority is to the detriment of other important social and environmental issues. Consumers and society at large expect companies to not only make money, but to also do good and be purpose driven.

Who can make impact investments and how are they made?

Both individuals and corporate entities (including not-for-profit organisations, charities and charitable trusts) can make impact investments, though restrictions may apply depending on the investment product. Like traditional investing, impact investments are usually in the form of debt (such as providing a loan or purchasing a bond) or equity (such as purchasing shares in the entity).

How are impact investments measured?

There is a dual approach to measuring the success of impact investments: the measurement of financial success and the measurement of impact.

The financial success of an impact investment is measured the same as a more traditional investment would be measured. Like more traditional investments, impact investments are made with an expectation of receiving a financial return on capital, or at a minimum having the capital returned.

In addition to the financial measurement, the success of an impact investment is also measured in relation to the social or environmental impact made by the investment. Social or environmental targets are set, and investors may receive reporting in relation to whether the investment’s use is meeting those targets.

Unlike measuring financial success, measuring the social or environmental impact is not standardised. Debate exists globally about how impact should be measured. Whilst multiple methods of measuring impact exist, each method has its pros and cons. However, whilst the lack of a standardised approach to measuring impact continues to be a barrier, Australia’s impact investing market is growing substantially.

How can a charity or not-for-profit organisation get involved with impact investing?

Charities and not-for-profits are experts at operating for purpose rather than for profit, after all they’ve been doing this all along. Charities and not-for-profits are therefore aptly prepared to get involved with impact investing.

One way charities and not-for-profits can get involved with impact investing is by investing their idle assets in impact investments. This allows for the charity or not-for-profit to grow their assets through investment whilst simultaneously advancing their purpose – a win-win!

In recent times, charities and not-for-profits have also begun creating their own impact initiatives (such as outcome-based projects and social impact bonds), and some have even established their own impact investment fund.

Money for charity-owned impact investing funds come from private capital, which is then invested in ways aimed at achieving a social or environmental impact in line with the purpose of the creator of the fund whilst also making a return for investors.

In a time where traditional forms of funding for charities and not-for-profits are lessening, considering whether impact investing could be used to achieve your charity’s or not-for-profit’s purpose is worthwhile. It is estimated that the potential demand from Australian investors over the next 5 years for impact investment products is $100 billion. This is a significant amount of money intended to be used for purpose, and charities and not-for-profits understand purpose.

If you would like to learn more about impact investing, please get in touch with our Charities + Social Sector or Impact Investing teams.

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