Impact Investments

Upon the closing of 2015, the impact investing markeImpactInvestmentstplace reached $60 billion. The increase in activity indicates that the market is gaining traction. The forecast is bright for the burgeoning market, which could ultimately spell a brighter future for our posterity.

Before impact investments became a viable alternative, societies relied on philanthropy and governments to meet the monetary needs of social crises and aid. The Rockefeller Foundation reports that those combined resources amounted to a few billion per year, a far cry from the $2.5 trillion annual funding needed to meet Sustainable Development Goals for developing countries.

Societies now have an alternative. Impact investments merge the interests of philanthropic outreach and market investments. They are funneled into organizations, companies and funds to provide capital for social and environmental programming. Such programs include sustainable agriculture, microfinance, sustainable technology, housing, education, and healthcare. Unlike grants, financial return is a key factor in impact investments.

The returns on impact investments may be below market rate, at market rate or, on occasion, concessionary. GIIN reports that portfolio performance often meets or exceeds investor expectation for impact and financial return.

Such returns are based on program output, a relatively novel approach to determining the success of social programming. Whereas governments financed social programming by defining inputs (i.e. microloans issued), impact investments gauge success and returns by program outputs (i.e. small businesses who get out of debt and stay out of debt). Investors are only paid if the outputs for the programs succeed.

The U.K. has forged the path for impact investments on a broad scale, relying on the funding for social impact bonds (SIBs). The most successful SIBs address issues of homelessness in urban settings. According to Social Finance, there are now 50 SIBs worldwide, including 31 in the U.K. and seven in the U.S.

Though interest in impact marketing is growing, not all are convinced that the merging of public and private interest is equally advantageous for both parties. Some believe the presence of such initiatives will only result in additional government cuts on social programming. Others are concerned that social welfare should not be left in the hands of the free market or wealthy investors who may deemphasize impact in exchange for greater returns. Conversely, a warm heart for good deeds done may not satisfy stakeholders, making impact investments untouchable territory for some.

Though the risks are high, impact investments still appeal to a growing number of investors. The market is even going mainstream. In January, Mark Zuckerberg and Priscilla Chan $44 billion future towards impact investments. The Ford Foundation has pledged 10 percent of its endowment as well.

With GIIN reporting vastly positive portfolio performance thus far, investors are opening up to the idea that human wellbeing can be a lucrative investment.

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AUTHOR

Erica Rascón specializes in online content creation and social media. She joined Yardi in 2011 after receiving her bachelor's degree from Kennesaw State University and serving in the Peace Corps. Erica's interests include sustainability, philanthropy, and the arts.

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