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Responsible investment terms: what is impact investment?



The recent growth in popularity and size of impact investment shows that social and environmental challenges can be tackled using finance.

Through impact investing, individuals decide to rely on companies, organisations and funds that will look to generate positive social and environmental outcomes, together with a financial return.

It is a relatively young field, emerging initially in the 1990s. By the turn of the century, the field had grown significantly and according to a recent survey, it will grow by 12.5% in 2013 to a global total of $9 billion (£5.6 billion).

Impact investments can be made in both emerging and developed markets, and target a range of sectors and places across the world.

According to the Global Impact Investing Network (GIIN), “Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise.”

Some examples include projects to help emerging markets adopt renewable energy, programmes to expand access to basic services for the poorest people and preserving rainforests and ecosystems.

The GIIN says, “The impact investing industry has the potential to steer significant sums of money to market-based solutions to the world’s most pressing challenges, including sustainable agriculture, affordable housing, affordable and accessible healthcare, clean technology, and financial services for the poor.”

A 2009 report from the Monitor Group estimated that impact investing could grow to $500 billion (£332 billion) in assets within the next 10 years.

The report begins by saying, “There are moments in history when the needs of an age prompt lasting, positive innovation in finance.

Evidence suggests that many thousands of people and institutions around the globe believe our era needs a new type of investing. They are already experimenting with it, and many of them continue even in the midst of a financial and credit crisis.”

Compared to socially responsible investment, which focuses primarily on avoiding unethical areas of investment,  impact investors want to make a further step, by choosing constructive industries and companies that can help emerging economies, tackle environmental issues and promote microfinance and sustainable development in unprivileged communities.

We face an uncertain future, with climate change, resource scarcity and global poverty. Arguably the most effective thing for investors to do is to invest in things that will benefit future generations.

Impact investment, therefore, holds the key to long-term prosperity.

Further reading:

Impact investment to grow by £1bn in 2013

Positive investing is the way forward for ethical investors

What kind of investor are you?

Sustainable investment flourishes amongst European high net-worth individuals

The Guide to Sustainable Investment 2012 (NEIW edition)