Impact Investing: What is it?

Impact Investing: What is it?

If you had to choose, would you rather invest in war, or education? As the old saying goes, what's popular isn't always right. Money makes the world go round, but as the financial crisis has shown, money flowing into the hands of the wrong companies or people can create more harm than good. The global economy's next task will be to place money in the hands of those who do good, and who will make money for others who plan on doing good, too.

What is Impact Investing?

Impact investing is the active form of socially responsible investing - seeking out commercial investments that return social impact and profits (The Chronicle of Philanthropy).

Traditional investing is a profit-only bottom line, meaning that for the amount of money investors put into a commercial company, they expect that money and more back into their own pockets. Impact investing is different than traditional investing in that investors seek more than one return on their investment; instead of only receiving the same or more dollars back then what they initially invested, impact investors expect a double bottom line on their investment: profit and social impact.

Two Bottom Lines

Investing, by definition, means to purchase an ownership interest in a company. In contrast, 501c3 non-profit organizations are not 'owned,' and therefore may not benefit any one individual or company with its profits.

The inability of investors to finance non-profits has given rise to a number of new tax structures (L3Cs or B Corporations) and hybrid organizations (a non-profit that forms a for-profit entity that can be privately invested in and uses its net profit to perform charitable work, such as TOMS Shoes) - all of which are collectively called social enterprises.

Since tax-exempt organizations are not able to take investments, donors are only able to receive one bottom line when they donate to a tax-exempt organization: social profit, the amount and type of social impact the organization creates. However, social enterprises can take investment capital, and investors that finance start-up social enterprises receive two bottom lines: social impact and a minimal profit.

Impact investing opens up new avenues for social entrepreneurs in need of early-stage funding, who can turn to investors interested in shaping social benefit while receiving minimal returns. In theory, social entrepreneurs no longer need to compete with other for-profit startups since they can now find investors happy on making marginal returns, so long as the enterprise is providing a social service that really does make an impact. As the practice of impact investing emerges and gains ground, so too do those who are working towards a common language and an infrastructure to bring the model to scale into a full-fledged industry.

Creating Sustainable Investments

Investors started searching for an alternative method to traditional financial markets after those crashed in 2008, realizing that, in the face of ecological limits, the riskiest investments may be those that depended on the existing economic order or the continued heavy use of diminishing natural resources; even riskier were those investors and companies that stayed fixated on short-term exploitation. In the face of loss, investors began exploring how impact investing could play a role in current global crises and ongoing crises such as poverty and climate change. In the very midst of what some experts called the Second Great Depression, impact investing did more than just keep its head above water - it grew in both name recognition and assets.

Although impact investing isn't exactly a new practice - companies and individuals have been financing sectors such as microfinance and clean energy for decades - the buzz around this new form of investment reached a full-fledged roar late last year when JP Morgan declared impact investing as an 'emerging asset class', with the potential to reach $1 trillion in assets by 2020.

As more people become aware of problems such as climate change or scarce resources, they continually realize that investing in innovative approaches to these critical problems is considered just smart investing. Sure, you can make millions while investing in questionable corporations such as Halliburton that may or may finance war, or you can create a better world when you invest in socially sustainable organizations like Vittana that has taken on the task of educating the next generation of youth in the developing world.

Those with cash in pocket have traditionally had to make the choice between profit or philanthropy; now, we no longer have to make that trite distinction.

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