Demystifying Impact Investing

Impact investing has emerged over the last decade as one of the most talked about new strategies for tackling social and environmental problems. The emergence of the concept has been accompanied by a great deal of hype and a confusing array of competing definitions of impact investing. There have also been many claims about what kind of financial return can be achieved while also solving social and environmental problems. Some analyses of the impact investing sector suggest that it accounts for $9bn of investment capital flowing through channels that are distinct from the mainstream capital markets from a range of investors including philanthropic foundations, high net worth individuals and traditional investors seeking to create impact alongside financial return. Others have questioned whether the approach is indeed new, whether projected financial returns will really meet the expectations of investors and whether impact investing truly refers to new sources of capital or is only a new term for traditional investments that happen to have positive social or environmental impact as a by-product.

The purpose of this report is to evaluate the size, scope and scale of the impact investment sector. We sought to answer several core questions. Firstly, rather than seek to develop a single comprehensive definition of impact investing, we have differentiated between investments on the basis of whether they seek to generate financial returns comparable to traditional investment with the same risk profile or whether they also accept lower financial returns to achieve higher social returns. To add a further layer of differentiation, we also distinguish between investment that focus on creating impact in developed and developing country markets. This approach allowed us to categorize the forms of capital and the geographic focus. Next, we sought to develop a clearer picture of what constitutes a market rate of return in impact investing and how this compares to traditional investments. We also examined the difference between targeted and realized rates of returns in impact investing to assess the performance of this investment category.

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