What is Impact Investing?
The most pressing problems of the next few decades will require the collective efforts of many people around the globe to address them. The big social problems we face like food and water security, access to education, climate action, and homelessness can be addressed by more than government entities or NGOs. Entrepreneurs are increasingly answering this call through social entrepreneurship.
Social entrepreneurship involves any type of business activity with a social purpose that utilizes market mechanisms to resolve social and environmental problems. Like all entrepreneurs, capital is needed to help scale these solutions to bigger markets. Investors can support these types of entrepreneurs through impact investing.
Impact investing specifically seeks to generate those social and/or environmental benefits while also delivering a financial return upon investing in social impact ventures. More and more eligible investors are exploring impact investing because you can put both your investment and philanthropic capital to work in order to address social/environmental issues at scale. Overall, investors have found that their portfolio performance overwhelmingly meets or exceeds their expectations (in terms of both social/environmental impact and financial return) when investing in this way.
How to Define Social Impact Ventures
Impact investing has been around for millennia but the current version of it can be traced back to the socially responsible investment (SRI) movement in the 18th century and the more common practice of today in considering environment, social, and corporate governance (ESG).
Social impact ventures can be defined in a multitude of ways but one commonly accepted framework to define these ventures is laid out in the United Nations’ Sustainable Development Goals. These goals outline the 2030 agenda for Sustainable Development as they “recognize that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth- all while tackling climate change and working to preserve our oceans and forests”. While SDG’s help build the framework around impact investing, IRIS and ESG impact measurements help to track that impact.
IRIS metrics were developed by the Global Impact Investor Network (GIIN) to provide impact investors and companies with a common understanding of how to effectively measure and manage their impact and how to improve that impact over time. These metrics help impact investors define and track the impact they desire to see across a portfolio of companies. It provides a common language for impact.
ESG indicators consist of 21 core metrics and 34 expanded metrics to help established companies define, track, and report on long-term, sustainable value creation. An update to the ESG indicators were launched at the Annual Meeting of the World Economic Forum in January 2020. The four pillars of ESG are Principles of Governance, Planet, People and Prosperity – which are aligned with the essential elements of the SDGs.
When looking at social impact ventures, seek to understand how they align to the SDGs and which metrics they track to quantify their impact.
How to Find Investable Social Impact Ventures
You can find communities of impact investors and investable social impact ventures by joining an angel group through the Angel Capital Association (ACA), reviewing equity crowdfunding platforms like Republic, or being part of the community for a social impact business accelerator, like SEED SPOT. All of these are a great way to find early-stage, investable social impact ventures. However, if you’re interested in investing into late-stage social impact ventures that are public, ETFs can give you access to those public companies.
An exchange traded fund (known as ETF) can be traded on an exchange like a stock. ETFs give you a way to purchase and sell impact assets without having to purchase those components individually. For an ETF, the fund provider, who owns the impact assets, designs a fund to track the performance of the impact assets that you would be investing in. Impact investors who are in an ETF that tracks a stock index, receive lump dividend payments, or reinvestments, for the stocks that compose the index. Resources like ImpactAssets50 provide free databases of impact investment fund managers and it serves as an amazing gateway, for investors, into the world of impact investing. You can also find some of the best impact investing ETFs by viewing Investopedia’s Q1 2021 investment report.
If you’re interested in learning more about early-stage investing, SEED SPOT is currently offering free angel training made possible through a generous grant from the Economic Development Administration in partnership with Canyon Angels. This training will provide you with knowledge on how to evaluate early-stage companies, understand deal terms, and will provide you with a community of other impact investors, like yourself!