Impact investing is a way of allocating resources that seeks to change lives while generating a financial return. Unlike traditional investing, which only focuses on economic profitability, or philanthropy, which donates money without expecting profits, impact investing combines the purposes of both: it finances projects, companies or initiatives that generate positive social or environmental change, while producing financial returns.
Money as a tool of transformation
Impact investing is based on a clear idea: money can be a tool to transform the world. Those who invest in this model seek two results simultaneously:
1. A social impact or measurable environmental: Improve people's quality of life or reduce environmental damage.
2. A financial return: Obtain sustainable profits over time.
For example, an impact investment fund may finance a company that produces affordable water filters for communities without access to clean water. If the business model is sound, the company will generate revenue from the sale of these filters, while improving the health of thousands of people by reducing waterborne diseases.
Impact investing ignores the idea that you have to choose between making money or doing good, as it demonstrates that both objectives can be achieved at the same time.
types of impact investments
1. Companies with social purpose Businesses that seek to solve social or environmental problems while being financially sustainable. That is to say, its business model is a social business model in which it considers not only how to generate profits, but also benefits for society. For example, M-KOPA offers solar panels to low-income families who do not have access to electricity. Its installment payment model allows people to purchase clean energy without having to make a large initial investment. Another example of these companies is Ilumexico which brings solar energy to communities that do not have access to the electrical grid. Its solar systems allow thousands of people to have light to study, work and improve their quality of life without depending on fuel.
2. Impact investment funds Groups of investors that raise capital to finance various initiatives with impact. Impact investment funds can act in different ways: making direct investment, being investment vehicles (channeling money from other investors) and/or providing strategic support (advising and strengthening companies). For example, Norrsken VC is a European venture capital investment fund, which is dedicated to backing companies combating global challenges while building large-scale businesses. Another example is ALIVE Ventures, a fund that invests in companies focused on improving the quality of life in Latin America.
3. Impact Bonds They are financial instruments in which private investors finance social programs and only receive a return if these programs achieve the expected results. These bonds allow governments and organizations to reduce financial risk and only pay for proven results. One of the first social impact bonds was structured by Social Finance to reduce prison recidivism. Investors financed rehabilitation and reintegration programs into society, and the government made its payments when it was found that the program reduced criminal recidivism. Likewise, in Colombia there have been social impact bonds promoted by MorePxR and organizations such as Corona Foundation and Investor channeled investments to finance programs that helped thousands of people find stable employment.
4. Impact startups They are emerging companies that use technology or innovation to solve social or environmental problems in a scalable way. These startups usually receive investment from impact funds or specialized accelerators. For example, Gojek offers technological and financial services to informal workers and small entrepreneurs, improving their access to economic opportunities in Indonesia. Similarly, Laboratory is a startup that trains women from Peru in programming and technology, connecting them with well-paying jobs in the digital industry. Her model has transformed the lives of hundreds of women in the region.
Difference with other investments
Impact investing is not philanthropy or charity, because it expects a financial return. It is not a traditional investment either, because it seeks something more than economic profitability. It sits somewhere in the middle: it wants to generate money, but without losing sight of its positive impact on society or the environment.
| Type of investment | Goal | Example |
|---|---|---|
| Traditional investment | Maximize profits by obtaining an economic return on that investment. | Invest in shares of an oil company without worrying about ecological damage. |
| Philanthropy and donations | Contribute to solving social problems without expecting financial return. | Deliver backpacks and instruments for a school in a vulnerable community. |
| Impact investing | Generate financial profitability while solving social problems. | Invest in a company that sells affordable solar energy to communities without electricity. |
Why is impact investing important?
1. Achieve long-term transformations Impact investing is relevant because, unlike donations or philanthropy, it allows you to focus on the long term. While donations require constant injections of capital to continue operating, impact investing fosters self-sustaining business models that continually generate social and financial benefits. This approach allows projects to not only depend on the will of third parties, but to develop structures that are economically viable in the long term, which gives them stability and autonomy to continue fulfilling their social mission without permanently resorting to external funds.
2. Promote more conscious companies Impact investment helps private organizations have a more marked social role in their operations. By aligning themselves with measurable social and environmental objectives, these organizations are driven to integrate these aspects into their business model and long-term strategy. This approach not only positions them as agents of change within their communities, but also allows them to have a more significant and sustainable impact in their sectors.
3. Generate more robust and structured organizations Impact investing makes organizations that seek to generate social benefits in key areas such as sustainability, marketing and growth more robust. These organizations, especially social ones, often have difficulties in aspects of business management. With the logic of impact investing, they can improve their internal capabilities and achieve their objectives more efficiently. By having strategic investment, they are given the opportunity to professionalize their operations and adapt to an increasingly competitive market, which allows them to expand their reach and increase their social impact in a more robust and solid way.