Impact Investing 2.0—Not Just for Do-Gooders Anymore

Abstract

Impact investing is a rapidly evolving field—depending on the type of investors asked, they will give a variety of definitions and expectations. Much of the field has derived from philanthropic roots; however, the latest developments are driven by an investment perspective. The historically assumed trade-off between financial return and social benefit is no longer a given. Astute investors realize that incorporating sustainability and environmental, social, and governance (ESG) factors into their analysis will often enhance long-term returns. Many of these impact-oriented trends are overlooked or undervalued by traditional investors, leaving an investment opportunity for those ahead of the curve. Before discussing the financial applications to impact investing, the article provides an overview of impact investing and its two disparate evolutionary paths, along with differing return and impact expectations. Impact investing 2.0 stems from the field’s investment side, and its primary characteristic is that the drivers of the impact are integrated into creating an above-market return, attracting all types of investors.

TOPICS: ESG investing, portfolio theory, portfolio construction

Key Findings

• • There is a growing area in impact investing that provides added value to investment returns by incorporating pertinent ESG and sustainability factors.

• • This article provides a tangible explanation of impact investing and an understanding of the evolution of the field. This two-pronged evolution has led to multiple definitions and varying return and impact expectations.

• • Traditional investors are showing more interest in the field as they realize that impact themes transcend philanthropic-oriented impact investing.