Social Impact Investment (SII), also known as Impact Investing, is an approach to investing that seeks to generate positive social and environmental impact alongside financial returns. It is fast becoming one of the world’s most and in Australia, it is expected to be worth around $500 billion by 2025.
The primary goal of social impact investment is to address societal and environmental challenges by using capital to create measurable, positive outcomes for both people and the environment. This synergy between addressing societal and environmental factors and having access to financial investment makes SII attractive for many not-for-profit and social enterprise organisations.
From the mid-2000s, as environmental, social and governance (ESG) factors began to take priority for consumers, businesses, and boards, SRI, while helpful, was limited by its emphasis on avoiding harm.
The advantage of Impact investing is that it is more closely aligned with the ESG responsibilities of businesses and brands because of the focus on investments creating measurable positive and social impacts as well as generating a financial return. , an independent non-executive director of insurance company QBE, says;
“Rather than just trying to reduce the negative impact of investments you have made, [impact investing] is proactively looking to have a net positive impact, or net positive externality, as well as delivering mainstream returns.”
This emphasis on SII seeking to balance investment return with a positive impact and an organisation's ESG responsibilities means it has some distinct benefits for companies.
The core advantage of SII is its ability to drive positive change by addressing pressing social and environmental issues. This can include areas such as clean energy, affordable housing, healthcare, education, poverty alleviation, and more. For example, it has been used for
Although impact investing has many benefits, it is essential to note that it has challenges. Some of these challenges and risks which must be considered include:
To mitigate these risks, investors interested in social impact investing should conduct thorough due diligence, seek expert advice, diversify their portfolios, and stay informed about impact measurement and reporting practices developments. It's important to carefully evaluate each investment opportunity's potential positive impact and financial risks.
All organisations, not-for-profit. social purpose or otherwise, at some point, will need external funding to enable them to grow further. Government grants, mainstream banks and financial institutions, traditionally the first point of call for this funding, is not a route open to many social purpose or not-for-profit organisations.
Traditional financiers may be unable to fund unproven business models and organisations without a profit-making track record. Also, certain financiers may require a minimum level of financial performance to be met before considering investing.
However, with the growth of the impact investing market in Australia ($1.2 billion under-investment in 2015, potentially growing to $500bn in 2025), many social purpose organisations are now finding impact investing is a potential solution to their funding requirements.