What Is Impact Investing?

Impact investments are investments made into companies, organizations, and funds with the intention to generate positive, measurable social and environmental impact alongside a financial return.
— The Global Impact Investing Network

Traditional thinking divided money sharply between:

1) Traditional investing to maximize profits, and
2) philanthropy to generate social or environmental good.

The impact investing field grew from the recognition that all investing has impact and existing funding methods that allocated just a small portion of assets to generate good, kept social change endeavors undercapitalized.

By deploying capital in creative ways to enable and encourage positive behavior, investors can enjoy a blended value of financial return and social and/or environmental impact. In turn, changemakers in nonprofits, social enterprises, and traditional businesses can access capital they need, sometimes at lower or more flexible rates.

Impact Investing Continuum

Impact investing spans a large market between traditional investment and philanthropy and presents a breadth of opportunities for generating a range of impact and financial returns. There’s not one right way or specific asset class to engage in impact investing as long as an investor is intentionally screening for the impact they want to make.

To one investor, investing in impact may involve a negative screen and divest out of fossil fuels, sugary food and beverages, or companies with inequitable practices in their supply chains like sweatshop labor. Another investor might conduct a positive screen, choosing to invest only in companies that continually reduce their carbon footprint, have commitments to equitable gender balance in their leadership, or employ veterans, refugees, and reentry populations, for example.

Investors may also screen opportunities based on expected returns, such as impact-first investors who value social or environmental impact above financial returns, or market-first or finance-first investors who prioritize financial return of market rate (or higher) over impact.

There is a wide range of impact and financial returns along this spectrum between traditional investing and philanthropy. Given the infinitely varied sets of values and objectives in the market, it’s important for all parties to communicate their goals to ensure they’re aligned.

Why Seek Impact-Based Financing?

For Nonprofit Organizations

Taking on debt is often a move into uncharted waters. Unlike grants and donations, loans need to be repaid, typically with interest — why would any executive or board agree to that? Of course, if you can get all the capital you need, in the time frame you need it, from philanthropic sources, by all means do! But loans can help nonprofit organizations with three key factors:

Faster

Yes, laying the groundwork for a strong loan application takes a bit of effort and differs from preparing a grant proposal, but it can be a much quicker process to get a loan to start a project than to run a capital campaign. If you need to get over a one-time hurdle (e.g. expanding into a larger facility) to accelerate your growth and generate earned income faster, debt can be a great option.

More

Total annual charitable giving in the US has held steady around 7% of GDP for the last 40 years, $360 billion in 2016. That seems like a large number, but compared to the combined balance sheet of commercial lenders, it pales in comparison. There is also growing appetite, in large part from women and millennial investors, to do good with their money while also making a financial return. Additionally, some foundations that provide loans are more flexible with their program criteria for loans than they are for grants since they also generate income from repayments.

Stable

Grants and donations should always have a role in a stable nonprofit, but diversified sources of capital allow you to better withstand changes in funding priorities, as well as provide increased control to run programs by your design.

For Businesses

Considering impact-based financing rather than or in addition to normal commercial debt might seem like an unnecessary headache. Thinking about how your product, service, or business methods are improving the community–and measuring that impact–on top of actually managing your company, may not be immediately appealing. However, impact-based financing can be beneficial:

Flexible

With philanthropic and quasi-philanthropic impact investment dollars as the primary source of capital, impact-based lenders like MDF can determine non-traditional underwriting criteria and loan security measures that other lenders cannot–opening up access to capital for different kinds of projects.

Sustainable

Customers and employees alike are increasingly drawn to organizations that demonstrate positive values in how they run their business. Clarifying your community commitment as you prepare for impact-based financing can help you market your business to increase customer loyalty and retain great staff.

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