MaRS Library Impact investing
Impact investing refers to the growing movement looking to invest in ventures that create a positive social and environmental impact and that are financially sustainable. Impact investments range from producing a return of principal capital to offering market-rate or even market-beating financial returns. Figure 1 shows how impact investing spans a range of financial and social ventures.
Figure 1: Types of enterprises and impact investing: Financial and social continuum
State of the Marketplace
The impact investing marketplace is relatively new, but it has gained significant momentum since 2008. This growth has been driven by a number of trends, including a greater appreciation that data beyond financial numbers affects investment decisions, and the recognition that philanthropy and government are not sufficient to address the scale of society’s pressing challenges.
In 2010, J.P. Morgan estimated that global assets under management in impact investing exceeded $50 billion, and it projected that invested capital could reach between $400 billion and $1 trillion within a decade. As of January 2013, the Canadian impact investment market was estimated at $5.3 billion; it is projected to grow to $30 billion by 2023.
Impact investments are made in both developed and emerging economies, across a range of social issue areas and sectors. These investment areas include:
- Community economic development
- Sustainable agriculture
Many investors or funds focus thematically on one or more social issue areas, depending on their interest or expertise. Others consider more broadly the impact generated by each investment in their portfolio.
For the most part, impact investments are made in the private markets and draw on traditional financing methods; for example, direct investment into social enterprises that make use of angel investing, venture capital and/or private equity. However, new products and initiatives have also sprung up in response to the demand for products that marry social returns and a financial bottom line. These innovations include:
- Community bonds (debt instruments that non-profit organizations offer to purchase an asset)
- Social impact bonds (contracts with public-sector bodies that incentivize improved social outcomes)
- Community investment notes (high-impact investment vehicles with a modest rate of return)
Who are Impact Investors?
In Canada and around the world, impact investing has been largely driven by wealthy individuals and families, private foundations, impact funds and select financial institutions, including banks, credit unions and development finance institutions. While retail products are becoming easier to obtain, the vast majority of impact investment opportunities are available to accredited and institutional investors.
Impact investors can be broadly segmented between “impact first” investors, those who primarily aim to generate social or environmental good and are often willing to give up some financial return if need be, and “financial first” investors, who seek investments that offer market-rate returns while achieving some social and environmental impact. (See Figure 2.) Many impact investment portfolios blend both categories of interests.
Figure 2: Impact investors: Segmentation
Source: Monitor Institute. Investing for Social & Environmental Impact: A Design for Catalyzing an Emerging Industry (2009) (PDF)
Figure 3: Some of the key players in the impact investing marketplace, in Canada and abroad.
To learn more about the financial players in Canada, visit the directory of funds as outlined by the MaRS Centre for Impact Investing, or contact the Centre directly.
Another valuable research tool is the ImpactAssets 50 (IA 50) an open-source public database of experienced private debt and equity impact investment fund managers. It highlights firms that operate in different sectors around the world. The tool is intended as a starting point for those looking to learn more about impact investing, not a comprehensive list.
The following resources offer further information on impact investing:
- Mobilizing Private Capital for Public Good: Canadian Task Force on Social Finance.
- Pioneering pay-for-success in Canada: A new way to pay for social progress.
- Impact Investing in Canada: State of the Nation.
- Making the most of our money: Why Canada and Ontario should invest unclaimed assets for social good.
- Education technology.