Impact Investing

Defining the Field

The term “impact investing” was created in 2007 at a convening of leaders from the fields of finance, philanthropy, and economic development, which created the building blocks of a more cohesive worldwide network of impact investors. While investors and philanthropists were practicing many of the ideals of impact investing before this meeting took place, it was the first attempt to build common language and strategies around investing with an eye on more than financial returns.

“Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.” -Global Impact Investing Network

The definition of what truly encompasses impact investing remains a subject of much debate today, as a simple internet search will yield broad ideas of what an impact investor is and the types of investments and returns available to those investors. Terms such as double bottom line (or even triple bottom line), responsible investing, and values-based investing all have been used as a synonym for impact investing, and at other times as separate and distinct strategies. Investors and other stakeholders often cite this lack of commonly understood terminology as a key barrier to the growth of the impact movement.3

As a jumping off point for the analysis of impact investing undertaken in this report, the Global Impact Investing Network (GIIN)—an organization dedicated to increasing the scale and effectiveness of impact investing—has proposed a concise definition: “Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.”

Intentionality is critical to the definition, as many investments have both a financial and social or environmental component to them—for example, an investment in wind energy—but they are made solely with financial return in mind. Additionally, evidence and measurement of social or environmental change is a required element of impact investing.

Shedding Light on the Capital Spectrum

While the definition cited above can help investors understand what is not an impact investment, knowledge of what falls under the impact investment category remains abstract. Given that impact investments can cover a number of different investment vehicles and strategies, investors are often met with confusion when they approach the topic.

To overcome the lack of clarity around the definition of impact investing, a spectrum of investment capital can be identified that details all investment types that fit the definition. The spectrum is bounded on the left by traditional investing, which emphasizes maximizing returns without consideration of any other environmental or social factors. On the right side of the spectrum, philanthropy takes nearly an opposite approach—focusing on environmental and social factors with little regard for financial return. Between these two poles lie a number of different strategies that bridge the divide between philanthropy and traditional investing practices, which can be given the name “purpose investing.”


Responsible Investing: As for-profit investors began to move into the purpose investing space years ago, their first strategy for integrating financial and social returns was the so-called “negative screen.” Negative screening entails eliminating companies from investment consideration because of undesirable characteristics in their industries or products. For example, polluting energy companies, producers of vices (e.g., tobacco or alcohol companies), and companies and governments that effect political harm are generally excluded in responsible investing portfolios. The approach of negative screening can, however, result in portfolios that underperform broader markets, either because of gaps in key sectors or unintended risk concentration.4

Responsible Investing 2.0: A more active approach to responsible investing includes “positive screens” for investment opportunities. This strategy focuses on opportunities to improve environmental, social, and governance (“ESG”) concerns through investment selection and shareholder advocacy efforts. This is also the part of the spectrum most commonly associated with Socially Responsible Investing (“SRI”) and ValuesBased Investing (“VBI”), both of which focus on achieving strong portfolio returns with certain ESG criteria in mind. According to a Morgan Stanley analysis, the long-term annual returns of one public equity index tracking companies scoring highly on ESG criteria has exceeded the S&P 500 by 45 basis points since 1990.5

Finance-First Impact Investing: Attempting to invest in high-impact solutions to global problems, the finance-first impact investing strategy seeks to employ private capital in companies, sectors, and geographies where social and environmental needs are creating growth opportunities that can yield market-rate or market-beating returns. In combining a strong impact philosophy with a desire to create market-rate returns, this capital deployment strategy is the “sweet spot” for many impact investors, but is also an area where little institutional knowledge has been built around developing investment opportunities, quantifying overall performance, and evaluating impacts.

Impact-First Investing: Requiring some financial trade-off, impact first investment strategies are often categorized by “concessionary returns” (i.e., below market-rate returns). Investments utilizing this strategy would otherwise go unmade if market considerations were the only driver for capital deployment. While profit and social returns are not mutually exclusive under an impact-first investment framework, foundations and high net worth family offices often are able to utilize impact-first investing techniques to complement their grant-making and charitable efforts because they do not have the same fiduciary responsibility as institutional money managers. As an example, the Omidyar Network employs a flexible capital model that includes impact investments in for-profit businesses alongside traditional grants in nonprofit organizations.

When considering the impact investing field in total for this report, only the areas of Finance-First Impact Investing (with market-rate returns) and Impact-First Investing (with concessionary returns) are included under the impact investing umbrella. This report will focus on building the knowledge base within these slices of the capital spectrum, with a particular focus on Finance-First Impact Investing, as its ability to generate returns that are comparable to other instruments makes it a viable investment option for many, if not all, institutional investors and high net worth individuals.

The Evolution of Putting Money to Work for Impact

While the range of strategies that make up impact investing can be neatly packaged into groupings using the capital spectrum, the instruments used to incorporate these strategies are much more diverse and do not lend themselves to easy categorization.

It has been argued that impact investments are their own asset class6 —akin to equity and fixed income— with a corresponding due diligence process, return expectation, and risk management requirement that is distinct from any other type of investment. Others think of impact investing not as an asset class, but as a wide range of investment vehicles that can be an integral part of portfolio creation—more of a lens through which to judge risk, return, and value creation rather than a specific investment class.7

In practice, impact investing requires both a differentiated approach to investment selection and management, as well as an enhanced ability to judge how impact can be integrated into broader portfolios. The following sections will explore impact investing’s evolution in the context of different portfolio strategies to better illustrate how dollars have been and can be deployed to produce both impact and financial return.

Investing through Philanthropy

The roots of the impact investing movement are closely linked to philanthropy. It was the Ford Foundation, in 1968, which made a pioneering move by making program-related investments (PRIs) in minority business development, the production of low-income housing, and the preservation of the environment.8 These loans—many of which were never repaid—complemented the foundation’s grant-making portfolio and provided synergies with its mission.

While PRIs must primarily serve a charitable purpose and are treated similarly to grants for tax purposes, philanthropic organizations have increasingly moved to mission-related investments (MRIs) as a way to address areas of social need while simultaneously building capital. Any investment in which the investor intends to generate both a social return as well as a financial return could qualify as an MRI—thus putting it squarely within the impact investing spectrum.

Examples of MRI practices for philanthropic organizations can include something as simple as holding cash deposits at community-owned banks and lending institutions, to direct equity or debt investments in companies or funds that seek to advance the social aim of the foundation.

The Growth of Impact Investing Funds

While foundations may have begun the impact investing movement, fund managers at both large financial institutions and newly capitalized funds have accelerated the trend by raising capital from philanthropic interests, high net worth individuals, and pension funds. The JP Morgan/GIIN global survey of impact investors found that nearly 75% invest via intermediary funds.9

The number of these funds is also growing tremendously, with 215 of the 310 funds tracked by ImpactBase opening since 2009.10 Nearly half of these funds are venture capital and private equity funds. These types of funds take ownership stakes in companies that are not publicly traded through negotiated transactions—investments that are high-risk and relatively illiquid, but that can have attractive return potential.


Asset class strategies and geographic focuses of these funds fall into numerous buckets, but their social impact targets can generally be grouped into three areas:

1. Creating social value through new products or services

        – The most common theme for impact investors is to organize around an issue area. Common impact objectives include, but are not limited to: sustainable agriculture and food systems; financial inclusion for marginalized individuals; educational opportunities; expanded access to low-cost health services; clean energy; conservation of natural resources; climate change mitigation; and access to safe drinking water.

2. Generating new employment opportunities for disadvantaged populations

        – While new products can create new opportunities, the companies producing these products do not always employ local workers. Microfinance investments are a classic example of providing small enterprises with an ability to scale and grow. Other investment types have targeted growing companies that employ low-income or low-skilled workers.

3. Investing in specific geographies

      – There are impact investors that will look to grow companies within specific economically disadvantaged areas of the globe, but more often, geography-first impacts are made through investments in real assets. This often comes in the form of housing, through international property funds or domestic low-income housing tax credits. Other examples of real property investments include sustainably forested timberlands and critical infrastructure investments in developing countries.

The Next Wave of Impact Investment Innovation

Fund investments remain the most likely avenue for impact investors to enter the market. However, social impact bonds, vaccine bonds, and green bonds provide examples of new structures that can provide investors with a combination of financial return and social impact.

In practice, impact investing requires both a differentiated approach to investment selection and management, as well as an enhanced ability to judge how impact can be integrated into broader portfolios.

Social Impact Bonds (SIBs), sometimes known as pay-for-success contracts, provide an innovative way for impact investors to put their money to use to address social issues. In partnership with local and/or state governments and non-profit service providers, social impact bonds use private capital to fund and scale innovative social programs that provide quantifiable public sector savings. Under this approach, both governments and investors can benefit from funding successful programs—as payments are only made from government to the private investor if the program meets targeted outcomes. SIBs have only recently emerged as an investment vehicle, with New York City launching the first SIB contract to reduce prison recidivism among juvenile offenders in August 2012. Goldman Sachs funded the program and the company could make up to a 5% annualized return on its investment if prison recidivism falls by more than 20% over the four-year investment period.11

Vaccine bonds were first issued in 2006 and have continued to be well received by institutional investors many years later. They provide up-front capital to organizations partnering with the Global Alliance on Vaccines and Immunization, which works to vaccinate youth in developing counties. Issued by the International Finance Facility for Immunization, the bonds are fully securitized by sovereign donors’ future aid contributions. Recent issuances have received AAA ratings from credit rating agencies, signifying the lowest risk of default. Under this structure, vaccinations can occur at a much faster pace in developing countries because the aid becomes front-loaded—as opposed to organizations having to wait to vaccinate each year based on government donations received—and investors’ capital is paid back over time through sovereign aid contributions.

Green bonds are debt securities—similar to corporate bonds or municipal bonds—that can be issued by development banks, corporations, or government to fund climate-related or environmental projects. Originally utilized by the World Bank in 2008 to support its strategy to introduce innovation in climate finance, the green bond market has grown from $4 billion in 2010 to over $41 billion in 2015.12,13 Green bonds differ from traditional bonds only in that their proceeds are earmarked for environmental projects, such as those in the areas of sustainable water management, energy efficiency, renewable energy production, and biodiversity conservation. Bond issuers clearly define the environmental projects they plan to support and report back to investors on the use of proceeds. Green bonds generally yield financial returns comparable to similarly rated traditional bonds, though their green characteristics allow issuers to reach new investors and raise awareness of environmental programs.

Spotlight on Impact:

Santa Clara County Pay-for-Success Project


California’s first pay-for-success contract was launched in Santa Clara County in August 2015 to provide housing and supportive services to the chronically homeless. Under the initiative, called Project Welcome Home, the county has partnered with Abode Services, a national leader in innovative housing services. Abode will provide homeless individuals with access to community-based clinical services and permanent supportive housing designed to end the participants’ homelessness and provide ongoing physical and behavioral health services.

Social Impact:

The project intends to serve 150-200 chronically homeless individuals over six years who are frequent users of the county’s emergency rooms, jail, and mental health facilities—all of which pose a cost to the county to operate. It is estimated that the 2,800 persistently homeless residents of Santa Clara County have average public service costs of $83,000 per year.

Investment Summary:

Project Welcome Home has received $6.9 million in senior and subordinate loan funding from private and philanthropic funders—including the Sobrato Family Foundation, The California Endowment, Health Trust, The Reinvestment Fund, the Corporation for Supportive Housing, The James Irvine Foundation, and The Laura and John Arnold Foundation is also providing capital for the project evaluation, which will be undertaken by the University of California, San Francisco. Palantir Technologies is providing the county with software and related services in support of the project.Under the pay-for-success contract, Santa Clara County will only make payments to funders if Project Welcome Home meets pre-determined outcomes, thereby ensuring that taxpayer dollars are only spent if the program is successful. Funders will be repaid based on the number of months of continuous stable housing achieved by project participants. The project’s target impact is for more than 80% of participants to achieve 12 months of continuous stable tenancy. If this outcome is achieved, success payments will repay funders their principal investment and annual interest. If the project reaches higher levels of impact, Santa Clara County could pay out a maximum of $8 million to investors over six years—funding directly associated with the savings accrued through the success of Project Welcome Home.