Impact-focused investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. By generating profits from an innovative business model, a company can pay financial returns to investors alongside doing something good for the world.
Impact investing works through investing in companies, funds and projects that deliver both financial returns and environmental and social returns. By attracting capital and entrepreneurial talent to companies that create positive change, impact investing approaches can contribute to more sustainable economic development. Impact investing can also be achieved through robust shareholder engagement in public markets. This is where the investor leverages their power and influence to encourage companies to improve their social and environmental performance.
The type and stage of companies in a portfolio can also influence the extent of the impact. Investors may have the greatest impact when they help fund early-stage companies to get truly innovative ideas off the ground, or by choosing companies and projects in developing countries (where capital is scarce and expensive).
Impact investing relies on measuring the specific change that an investor’s capital has enabled. Most impact-focused investing strategies help investors focus on economic activities that address specific sustainability challenges outlined by the United Nations Sustainable Development Goals (SDGs). This is because the SDGs can help identify where private capital can make the most difference. Investors that want to make a measurable impact can use the SDGs as a guide to make decisions about where best to put their wealth to work.