The Three Basic Parameters of Impact Investing
For investors who put their money into social or environmental projects in what is known as “impact investing”, determining how much of their investment actually achieves their objectives can often be difficult because results are often amorphous and ill-suited to quantification. Effectively defining how an investor’s contribution actually is distributed and measured breaks down into three categories: enterprise impact, investment impact, and nonmonetary impact. Going through the effects of each category will give investors a better understanding of the actual impact of their financial contribution.
Enterprise impact can be understood as the social value of the goods and services (along with other benefits) that are provided by the enterprise of the investee. There are two parts to enterprise impact that have an effect socially on a region. One is through product impact where goods and services are financially supported and produced by the enterprise. This could come in the form of something such as a medical advancement or providing access to clean water.
Operational impact is a subset of enterprise impact and is the impact the enterprise management has on the health and financial security of its employees. The more social effect such as with jobs and community well-being are a part of operational impact as well as environmental effects of supply chain and operations.
Investment Impact is the direct relationship of the difference in quantity or quality of the output of the enterprise without the investment occurring. Investment impact is successful if it in fact provides more capital or production at a lower cost. Those who invest with a social purpose or intent are either motivated enough to take huge risks and accept lower returns in order to achieve their social goals, while others are not willing to take any financial sacrifice for the potential return. Philanthropically speaking, these non-concessionary investors who do not wish the risk of financial loss typically participate in mission-related investments. These are different from concessionary investments that are program-related.
The third means of impact investing is through nonmonetary impact. Investors such as governmental donors and foundational donors can provide funding to the social and political environments within the operation of social enterprises. To further explain, providing the public beneficial goods or systems for improvement along with a set of investments in a particular sector can be much higher potential for aiding markets as opposed to investing in a number of random individual enterprises.
Ways of finding impact investment opportunities can be difficult. That is why utilizing impact investment intermediaries is important for the discovery of investment opportunities. This brings opportunity in front of investors while also eliminating any misinformation about the investment opportunity itself. These investment intermediaries along with fund managers will reduce the cost of transactions by creating economies of scale. Many offer technical assistance to investors as well. Fund managers and third parties will provide nonmonetary benefits that will help maturing enterprises nurture its relationships with its customers, partners, and suppliers.
For investors who are expecting to make an ROI, they must ask themselves whether their investment will actually benefit the company in real dollars and cents, and if so, how much of a return? For investors who go in with the willingness to sacrifice their capital for little to no return in the name of social and environmental impact, they should ask themselves how much of their investment is worth the value created by the organization. Understanding the benefits and returns of impact investing depends on all three of these measures working to change the marketplace.