Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
Global Impact Investing Network (GIIN) definition
What is Impact Investing?
Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Two different types of impact investing strategies exist: (i) generic impact investments and (ii) tailor-made solutions to market failures. In both cases social impact is sought and achieved, yet the latter seeks to promote transformative change by directly tackling the market failures that lead to key issues such as poverty, climate change, etc.
Although impact investing is often compared to sustainable investments (SRI/ESG), these types of investments are based on exclusion principles/negative screening which focus primarily on avoiding investments in "bad" or "harmful" companies. Instead, impact investments seek to actively create tangible social/environmental impact along with sustainable financial performance.
The Impact Investing sector was born from the realisation that philanthropy alone is not enough to tackle the issues faced by the world’s most vulnerable populations today: eliminating poverty, providing access to clean water, health and sanitation, education… The United Nation's Sustainable Development Goals aim to address these critical social issues, requiring investments totalling USD 3.9 trillion per annum in order to solve them. Unfortunately, only USD 1.4 trillion are currently invested per year, leaving a funding gap of USD 2.5 trillion per annum in order to achieve the SDGs. This amount is impossible to cover with public financing and charity alone, which is where impact investing’s fundamental role arises.
Why impact investing?
USD 2.5 trillion in additional investments are required to achieve the SDGs - impact investing will be key in mobilising these funds.
Impact investing channels much-needed private capital into investments that aim to address the world's most daunting social and environmental challenges, by offering a financial return to investors. Impact investing can focus on a range of geographies, sectors and asset classes, whilst providing different financial return profiles. The result is a dynamic industry that plays a crucial role in improving the lives of millions around the world.
Impact investing has been identified by governments and development institutions worldwide as a key tool to achieve the SDGs and promote socioeconomic development around the globe. In this sense, mechanisms such as "Blended Finance" have arisen, involving the mix of development aid incentives with private capital to "de-risk" investments in initiatives that have significant social/environmental impact. Blended finance will thus be vital in catalysing private sector investment in these projects, acting as a pivotal component for the impact investing sector to fulfill its potential.
A perfect example of blended finance can be seen in GAWA's latest fund, Huruma, via which investors will enjoy a EUR 10 million first-loss facility to absorb any losses (funded by the European Union and managed by COFIDES, the Spanish Development Finance Institution), in addition to EUR 20 million in concessional debt from the Spanish International Development Agency (AECID-FONPRODE). Each of these will reduce the risk and enhance the return for private investors in the Fund. Click here to read more about Huruma.