Impact investing is when people put their money into companies, groups, or funds that aim to help society or the environment in a way that can be measured, while also trying to make a profit. At its heart, impact investing means matching what investors believe is important with where they choose to invest their money to solve social or environmental problems.

Investors who focus on impact look for ways to support businesses, nonprofits, and funds in areas like renewable energy, education, and microfinance. Large groups, such as development finance institutions, pension funds, and endowments in North America and Europe, have been important in growing impact investing. During Pope Francis's leadership, the Catholic Church showed more interest in impact investing.

Impact investing happens in different types of investments, such as private equity, venture capital, debt, and fixed income. These investments can take place in both new and established markets. Depending on the goals of the investors, the returns from impact investments can range from less than usual to more than usual.

Development

Historically, rules and, to a lesser degree, charitable efforts aimed to reduce the harmful effects of business activities, such as unintended consequences and externalities. At the same time, individual investors have long used socially responsible investing to support their values, often by avoiding investments in companies or activities with negative impacts.

Around the same time, methods like pollution prevention, corporate social responsibility, and the triple bottom line were developed to measure non-financial effects within and outside companies. In 2000, Baruch Lev from NYU's Stern School of Business gathered ideas about intangible assets in a book with the same name, which helped expand understanding of non-financial effects of business operations.

The term "impact investing" was created in 2005 by Mark Zapletal of Wartenberg Trust during a presentation titled "Impact Investing, a Door to Sustainable Philanthropy" at the Global Family Office Summit in New York.

After the Great Recession, impact investing funds became more common as a way to support socially responsible investing. These funds seek to combine charitable, public, and private money to create social or environmental benefits while also earning financial returns.

Scholars suggest that the rise of impact investing after the crisis may have been influenced by criticism of financial institutions and profit-focused models. From this view, impact investing showed efforts to include social outcomes in how private capital is used.

Following the United Nations' adoption of the Sustainable Development Goals (SDGs) in late 2015, many companies began aligning with the goals. The SDGs require about $5–7 trillion in annual investment, most of which is expected to come from private sources. As a result, impact investors worked to meet this funding need by connecting their investments to the goals.

By the 2020s, impact investing expanded into various financial sectors, such as private equity, private credit, and venture capital. Specialized investment firms created funds focused on addressing specific issues, like environmental challenges, poverty, and discrimination.

Industry

As of 2024, there are about 3,907 organizations involved in impact investing. These groups manage approximately $1.571 trillion USD in impact investments, which is much smaller than the global equity market, which is worth $78 trillion USD. A 2024 report from the Global Impact Investing Network (GIIN) found that the impact investing industry grew at a rate of 21% each year since 2019. The largest areas where impact investments are focused include energy, housing, financial services (such as microfinance), and healthcare.

Impact investing is different from crowdfunding platforms like Indiegogo or Kickstarter. Impact investments are usually debt or equity investments of more than $1,000. These investments often take longer to pay back than traditional venture capital investments. Some impact investments may not have a clear way to get money back, such as an initial public offering (IPO) or a buyout in a for-profit startup. While some organizations that receive impact investments are nonprofits, impact investing typically supports for-profit businesses that aim to solve social or environmental problems.

Organizations that receive impact investment funds can be legally structured in different ways, such as for-profit, nonprofit, benefit corporations, low-profit limited liability companies (L3Cs), community interest companies, or other types that may vary by country. In much of Europe, these organizations are often called "social enterprises."

Impact investing funds aim to achieve both social and financial returns. Studies of existing funds show that many investors are willing to accept returns that are 2-4 percentage points lower than usual. Some investors may be more willing to accept lower financial returns if the investments focus on environmental impacts, while others may be less willing to do so in other categories.

Institutional impact investing

Impact investments happen in different types of investments and with various amounts of money. One well-known way is through private equity or venture capital. "Social venture capital" or "patient capital" works in a similar way to other venture capital investments. Investors might help guide or support a company's growth, just like venture capital firms do for early-stage companies. Hedge funds and private equity funds can also use impact investing strategies.

There are also programs called "impact investment accelerators" that help social enterprises at the start or growing stages. These are similar to programs that help traditional startups begin. Impact investment accelerators usually provide smaller amounts of money than larger investments. Most of these accelerators are nonprofit organizations that get money from donors to offer business support services. Some accelerators that focus on making money are also starting to appear.

Large companies are also becoming important in impact investing. Companies that want to create value for both people and businesses are using impact investments in their operations, especially in their supply chains.

Impact investing can help organizations become self-sufficient by allowing them to carry out their projects without relying heavily on donations or government funding.

More people who follow religious beliefs are showing interest in impact investing because they want their investments to match their values.

Governments and public institutions, including development finance organizations, are encouraging pension funds and other large investors to join them in funding projects that have a positive effect, especially in the Global South. Experts from groups like the World Pensions Council and others in the United States and Europe support this approach, but they also say that:

Mission investments are investments made by foundations and other organizations that focus on specific goals. These investments use part or all of their funds to create both social or environmental benefits and financial returns. For example, after the Heron Foundation found an investment in a private prison that went against its mission in 2011, the foundation created a four-part ethical framework for its investments, called Human Capital, Natural Capital, Civic Capital, and Financial Capital.

Examples of foundations that make investments to support their goals include the Bill & Melinda Gates Foundation, Soros Economic Development Fund, and Ford Foundation.

Program-related investments (PRIs) are investments, often made by foundations, that provide financial support at lower rates or with special terms. These investments are meant to help achieve charitable goals rather than make money. This includes recoverable grants, loans with lower interest rates, investments in research or early-stage companies, loan guarantees, and volume guarantees. For private foundations, PRIs count toward the required 5% annual spending.

Mission-related investments (MRIs) are investments made from funds to support organizations that focus on specific goals. These investments aim to earn returns similar to regular investments and help the organization's financial growth. Examples include loans to non-profit organizations, like schools or hospitals, that are expected to repay the loans with interest, as well as investments in for-profit companies that help society, social impact funds, socially responsible bond funds, impact-focused private equity funds, and public stock portfolios.

Impact investing by individuals

Impact investing was traditionally available only to large organizations. However, individuals can now support early-stage or growing businesses through various methods.

Exchange-traded funds (ETFs), such as the SPDR Gender Diversity ETF from State Street, are traded on the stock market and can be purchased by anyone with a brokerage account. MSCI provides 11 ETFs focused on environmental, social, and governance (ESG) issues, including those that track low-carbon and sustainability trends.

Groups of individual investors, called angel investors, also support impact-focused businesses. These groups pool money to invest in ventures that aim to create positive change. An example is Clearly Social Angels in the United Kingdom.

Online investing platforms allow people to invest at lower costs. Because buying shares in small businesses can be expensive, many platforms offer microfinance loans instead. MyC4, which started in 2006, let individuals lend money to small businesses in African countries through local partners. However, the service closed permanently in 2019. Microplace, an early U.S. platform, stopped accepting new loans in 2014, stating its efforts had not achieved the desired level of social impact.

Impact investing in Asia is growing rapidly. In Southeast Asia, from 2007 to 2017, Private Impact Investors (PIIs) invested $904 million, while Development Finance Institutions (DFIs) invested $11.9 million in impact-focused projects.

Private equity and venture capital

Impact investing organizations and funds also invest in companies by buying shares, similar to traditional private equity and venture capital funds. However, these investments must have a positive effect on communities or the environment. A 2021 study from the Wharton School at the University of Pennsylvania found that venture capital has been the main type of investment in the impact investment field.

Gender lens investing

Gender lens investing is a type of impact investing. It means putting money into companies, groups, or funds with a clear goal of helping improve gender equality. These investments support businesses that hire women, give women leadership roles, or treat women fairly in their supply chains. They also help services that teach women new skills or give them more power. This kind of investing started because women often have trouble getting money to start or grow businesses. Around the world, women have less access to financial resources and face more challenges in getting loans or investments.

Women who start businesses have had a hard time getting money from male investors. In 2019, a magazine called Fortune reported that only 2.2% of all venture capital went to women who started companies. Together, all women who started businesses raised less money than one company that makes e-cigarettes. Some women have tried unusual ways to avoid being treated unfairly. In 2017, a newspaper called the Telegraph wrote about the founders of a company named Witchsy. They made up a fake third male founder to talk to male investors.

Gender lens investing is becoming more popular. Over 100 investment funds are now open to people who want to invest. In 2018, the amount of money managed through gender lens investing increased by 40%, according to a company called Veris Wealth Partners. More people are interested in this type of investing, and large banks now offer gender lens bonds. These include companies like NAG, Goldman Sachs, and Merrill Lynch, among others.