what is it?
Impact investing refers to a growing category of investing in which investors want to create both financial return and a social impact. Impact investors look for companies that are profitable, intentionally address a social or environmental challenge, and are able to measure their impact.
Environmental, Social, and Governance Criteria (ESG)
Okay, so how do investors choose which companies to invest in? One way to do it is to assess how well a company meets environmental, social, and governance criteria. In fact, impact investing is sometimes referred to as ESG investing.
Environmental criteria refer to a company's resource management, ecological footprint, levels of pollution, etc.
Social criteria refer to health and safety, community relations, supply chain management, etc.
Governance refers to shareholder rights, transparency and accountability, code of ethics, etc.
ESG investing is based on the assumption that these factors have financial relevance. In other words, the more responsible companies are in terms of environmental, social, and governance factors, the better they will perform financially.
UN Sustainability Development Goals (SDGs)
When choosing companies to invest in, impact investors also look at whether a company targets one of the UN's 17 Sustainable Development Goals (SDGs). Read more on our UN SDG page.
When traditional investors want to measure their return on investment (ROI), the process is pretty straightforward. How much money do they invest and how much do they earn?
But what about impact investors who are interested in both financial and social returns? Is there a way to measure social impact?
Social Return on Investment (SROI)
One method, known as social return on investment (SROI), monetizes social, environmental and economic factors so that they can be incorporated into a cost-benefit analysis. This way, you can understand a company's social impact in financial terms.
While SROI is one tool for measuring impact, assigning a dollar value to social and environmental impact is not always feasible. Ultimately, measurement depends on the investor's and organization's goals, and usually requires a lot of hard work to monitor, collect data, and report.