Understanding the impact investing ecosystem is essential for various actors. Social entrepreneurs can access alternative sources of capital while investors can use impact investing as a means to align their financial goals with mission goals or expand their portfolio into new asset classes.
Impact investors often focus their investments to address social or environmental challenges by investing in areas such as microfinance, sustainable agriculture and affordable housing. Their investments may also complement existing philanthropic or grantmaking efforts.
1. Investors
Investors can participate in impact investing through private companies and funds that align their financial returns with social missions, such as Aspiration. Other examples of impact investments include direct investments into nonprofit loan funds focused on specific issues like microfinance, fair trade, sustainable agriculture or renewable energy.
Investors can also provide funds via crowdfunding platforms, community investment notes and local bonds to support social entrepreneurs. Furthermore, corporate entities may allocate resources towards community investments that align with their moral or brand values.
Governments can play a pivotal role in driving awareness, skills and capital to the ecosystem by supporting demand-side stakeholders with technical assistance, investment readiness programs and procurement opportunities; supply-side participants with tax incentives, grants and guarantees. Furthermore, governments may create and facilitate intermediary organizations like social stock exchanges, advocacy organizations, bankers, researchers or monitoring and evaluation agencies.
2. Nonprofits
Nonprofits looking to maximize the impact of their philanthropic funds can find new financial models and long-term partners within the impact investing community. Furthermore, nonprofits can learn ways to include stakeholder engagement into their operations as well as invest in social initiatives through pay-for-success contracts.
Investors looking to align their investment choices with their values can begin by divesting from companies that fail to meet environmental or social standards and moving assets into SRI or ESG funds – this form of mission-align investing.
Another effective form of impact investing involves loan funds that provide start-up capital to nonprofits and allow them to expand once their model has proven itself. This form is among the more prevalent methods of investing for social impact.
3. Governments
Studies reveal that impact investments frequently exceed investor expectations in terms of both social and financial returns, making these investments increasingly appealing to those seeking to expand the impact investing sector. This report examines what this means for those looking to grow this segment of finance.
This report explores how governments can participate in the impact investment ecosystem both as demand side players (through technical assistance or investment readiness programs) and supply side actors (e.g. by creating wholesale banks, exchanges or other channels that connect investors with impact investments).
This report details some of the challenges affecting impact investing, and offers solutions that could move it forward. Additionally, social impact bonds – which do not fit traditional asset class definitions – are featured prominently.
4. Intermediaries
Intermediaries play an essential role in impact investing by providing liquidity, products, platforms and advice that reduce transaction costs for investors. They may also offer advice regarding different types of impact investments and possible portfolio structures to investors.
Governments play a vital role in both the demand and supply sides of an ecosystem by raising awareness, skills and capital inflows. Furthermore, governments may assist social enterprises through technical assistance programs and procurement programs or offering tax incentives, guarantees or subsidies in order to encourage investment.
This study has developed a framework to understand the ecosystem surrounding impact investing, such as policy, markets, human capital development and culture as well as finance. As examples for its six pillars model it cites OECD and BEEP ecosystems as illustrations; however this framework still needs testing and fine-tuning.
5. Platforms
Not only can platforms provide information about impact investment opportunities and products, they can also act as intermediary services that facilitate transactions and act as aggregators, brokers or depository institutions for transactions relating to equity investments, debt investments, philanthropy or grants.
This report offers a comprehensive and detailed picture of all players involved in impact investing, categorizing them into five distinct groups: impact investors, product providers, investees, intermediaries and information professionals and service providers. Cultural and socio-economic conditions also play a factor in these stakeholders’ behavior.
Impact investments come in many shapes and forms: debt, equities, hybrid financing models or even philanthropy. By understanding their personal values, goals, objectives as well as social/environmental priorities and return expectations, individuals can create an impact investment portfolio tailored specifically to them.
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