IMPACT INVESTING: Tracking the Adoption of a Financial (and Social) Innovation

IMAGINE A WORLD IN WHICH it is possible for a financial innovation to generate solid returns alongside positive social and environmental impact. This is the promise of an emerging investment approach called ‘impact investing’ that is gaining the attention of pioneering investors: big institutions, foundations and high net-worth individuals are moving quickly into this new market. However, in order to succeed, impact investing will need to grow beyond these pioneers and reach a broader set of investors.

In The Diffusion of Innovations, Everett M. Rogers proposes that five attributes influence the spread of any innovation:

• its relative advantage over alternatives;

• compatibility with the values, experiences and needs of adopters;

• simplicity;

• trialability; and

• visibility.

Applying these principles to impact investing in its current state, it clearly fails on more than one of these measures. However, if impact investing can address barriers to adoption and play up its key strengths, it may well continue to grow and deliver on its promise: better investing and a better world.

What is Impact Investing?

Impact investments are one type of socially-responsible investment (SRI). Among the more familiar SRI approaches are ‘screens’ (to filter out unwanted companies, such as tobacco or oil) and environmental, social or governance risk analysis (to reduce exposure to risks relating to specific firms). However, only impact investments include a specific intent to create a measureable social or environmental impact and simultaneously produce a solid return on investment.

Impact investing is one of the fastest-growing areas of the capital markets. Globally, there were over US$77.4 billion