An Introduction to Impact Investing

John Tennaro, CIMA®, CSRIC™
July 23, 2020

Impact investing challenges the view that social and environmental issues should be addressed only through philanthropy and charity—and that investments should focus exclusively on achieving financial returns.

What is impact investing?

Impact investing provides money and investment to companies, organizations and projects that address social or environmental challenges—such as sustainable agriculture, renewable energy, conservation, microfinance, and access to affordable basic services, including housing, health care and education.

Impact investments

Impact investments come in many different forms and can be made across asset classes, in both emerging and developed market economies. However, despite the diversity, the goal remains the same for all impact investments: to create tangible and lasting change to benefit society and/or the environment, in addition to generating a financial return.

Impact investing

Impact investing can be as simple and straightforward as banking at a community bank that helps expand economic opportunities for low-income populations, or supporting entrepreneurs in the developing world through a microfinance fund.

However, impact investments can also be incredibly complex. While some impact investments may have the potential to generate attractive returns for investors, these investments often involve new opportunities in the private sector and can carry significant risk, and have limited transparency and liquidity.

When investing for change, it is important to have a clear vision of the change you want to see. As investors, we contribute to the effect our investments have through our investment dollars. With impact investing, investors can invest in positive change by using their investment capital to actively contribute to solutions that help people’s lives and the environment.

Three key characteristics of impact investing

There are three characteristics that can be used to define impact investing:

  1. Intentionality

    The investment opportunity must intentionally contribute to social and/or environmental solutions. This is what differentiates impact investing from ESG (environmental, social and governance) investing and socially responsible screening strategies.

    With impact investing, it is important to have an investment thesis that explicitly states impact goals and the strategies that will be used to achieve them.

  2. Measurable impact

    You must be able to measure the impact of an investment by using  quantitative and qualitative evidence to demonstrate increased contribution and progress toward the investment’s impact objective.

    This involves aligning a social or environmental need with empirical and scientific data, as well as anecdotal evidence gathered from the community the investment seeks to serve.

  3. Return expectations

    Impact investing is not a charitable contribution. Impact investments are expected to generate a financial return on capital or, at a minimum, a return of capital.

    Return expectations for impact investments can range from concessionary (below market) to market-rate and market-beating returns.

Because impact investing is a growing market, it is also evolving. If you are interested in learning more about impact investing or how to invest to have a positive effect on the world, talk to your CIBC Private Wealth advisor.

 

John Tennaro is the Head of ESG & Impact Investing Solutions, and is responsible for overseeing all aspects of our firm’s approach to ESG & Impact Investing.