Impact Investing What Is Impact Investing? | Morrison Foerster (2024)

Also known as socially responsible, sustainable, double, triple (or quadruple) bottom line, or ethical investing, impact investing is defined by the Global Impact Investing Network as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”

Most such investors cite their focus on environmental, social, and/or governance (ESG), with varying emphasis on one, two, or all three factors.

The History of Impact Investing

Although the term “impact investing” only dates to 2008, the investing philosophy has existed in various forms for centuries.

In early iterations of this investment strategy, those providing capital to business actively sought to avoid impacts that could cause harm. In the 1700s, Quakers and Methodists were admonished to avoid investments and businesses that harmed others. These included:

  • slave trading
  • owning tanneries
  • investing in items such as guns and tobacco

There are also, more recently, financiers who actively sought to make their money at the same time that they were doing good. Ben & Jerry’s Ice Cream — one of the better-known socially responsible companies — has a three-part social mission. Its values include:

  • “Promoting business practices that respect the Earth and the Environment”
  • “Actively recogniz[ing] the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally, and internationally”

Today, impact investments are on the path to becoming increasingly mainstream and increasingly popular. Such investments can be made in either emerging or developed markets, and investors may target a range of returns from below market to market rate.

Three Types of Impact Investors

Impact investors generally fall into one of three categories: impact-first investors, investment-first investors, and catalyst-first investors.

Impact-First Investors

These investors primarily seek to maximize the social or economic impact of their investment. Financial returns, if there are any, are a secondary goal.

Foundations are one of the more common examples of an impact-first investor.

Under U.S. law, foundations must annually distribute five percent of their assets. So-called program-related investments (PRI) into socially responsible investments are one way foundations can distribute that money. As an added benefit to foundations, PRIs are exempt from the excess business holding tax.

In contrast, mission-related investments (MRI) do not count toward the five-percent requirement because they are intended to generate revenue as well as accomplish mission; however, foundations may use both PRIs and MRIs simultaneously.

Investment-First Investors

These investors strive for market-rate or premium returns on their investments, with a positive social or environmental impact as a secondary goal. Employing this strategy, investors measure the performance of their investments by not only the financial bottom line, but also social impact, and are increasingly focused on measuring and reporting on ESG in the same way as financial returns.

DBL Investors and Generation Growth Capital are examples.

Catalyst-First Investors

Catalyst-first investors want to give or invest in collaborations to build the impact investing industry and infrastructure. These investors typically give equal weight to both social impact as well as financial returns.

Other Players in the Impact Investing Sector

Self-designated impact investors and socially responsible organizations don’t operate in a vacuum. There are a number of other players whose participation helps support and grow the sector. Among the key participants:

  • Commercial Markets: Important in later stages of scaling up impact investing industry sectors, commercial markets prioritize returns over social impact.
  • Development Banks and Institutions: An excellent source of funding for impact innovators, however their participation is typically limited during high-risk early-stage investing.
  • Foundations: Thanks to U.S. laws requiring foundations to annually distribute at least five percent of their assets — which can take the form of PRI initiatives — foundations can invest in for-profit organizations that are committed to delivering a positive social impact.
  • High Net-Worth Individuals: These investors tend to embrace innovation and have high risk tolerance. They are often willing to experiment with market-based and for-profit approaches to achieving social impact.
  • Ethical Banks: Working alongside impact companies, ethical banks frequently invest in local initiatives, enabling them to create real change at the local — if not global — level.
  • Microfinance Institutions: Recognizing that small loans can have a tremendous impact on low-income populations, microfinance institutions provide financial services to the poor and are effective at reducing poverty in developing countries.
  • Social Stock Exchanges (SSEs): Using SSEs, investors can buy shares in a social business just as investors focused solely on profit would do in the traditional stock market. Some are only open to accredited investors. The four best known SSEs are the UK’s Social Stock Exchange, Singapore’s Impact Exchange, Canada’s Social Venture Connexion, and the U.S.’s Mission Markets.
  • Government: Social impact bonds from government institutions provide capital to social service organizations that are successfully improving outcomes. Commonly, investors provide initial external financing and receive a return from bond payments only upon the achievement of agreed-upon outcomes.
Considerations for Impact Investors

Before making any impact investments, individuals and organizations should ask themselves some questions to help hone in on the most appropriate opportunities.

First, consider the choices for an impacting investing philosophy:

  • Are financial returns more or less important than the company’s impact-related mission?
  • Does the investor want to focus on specific areas of impact, such as social goals, environmental goals, or specific geographic areas?

Individuals and organizations making large-scale impact investments — including those who are providing startup financing or those purchasing significant equity stakes in a business — will want to give addition consideration to maximizing the impact of their investment.

For example:

  • If the company is a startup, what corporate form should the new entity take?
  • How should transactions be structured?
  • What can both the organization and the investor do operationally to improve the social and environmental impact after the investment has been made?
  • How can the company’s social and/or environmental impact be measured and reported to ensure that there is accountability?
Going Forward

With the wealth of options for those interested in impact investing, the most important tool is an adept advisor to assist in weighing options, structuring transactions and financing, and overall corporate governance.

Morrison Foerster is one of the most knowledgeable firms in this space. The firm represents:

  • nonprofit and for-profit social enterprise companies
  • impact investors
  • venture funds

Our work spans all aspects of impact investing, including advising companies on corporate forms and structuring transactions to help ensure impact.

For more information, contact

Impact Investing What Is Impact Investing? | Morrison Foerster (2024)


What defines impact investing? ›

NOUN: Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

What is impact investing best examples? ›

An impact-investing strategy is an investment strategy that targets companies or industries that produce social or environmental benefits. For example, some impact investors seek to support renewable energy, electric cars, microfinance, sustainable agriculture, or other causes that they believe to be worthwhile.

What are the three components of impact investing? ›

The main elements of impact investing include:
  • Intentionality. Impact investing is purpose-driven. ...
  • Measurable Impact. Impact investments have measurable, quantifiable and transparent outcomes. ...
  • Expected Returns. Like traditional investments, impact investments involve an assessment of risk and return.
Oct 25, 2023

What is impact investment for dummies? ›

Unlike traditional investing, where the goal is purely financial gain, impact investing seeks to make a difference. Impact investing firms support causes like renewable energy, healthcare, education, and economic development.

What is the problem with impact investing? ›

There are a number of risks and challenges associated with impact investing. One of the key risks is that impact investments may not generate the intended social or environmental impact. Another risk is that financial returns may be lower than anticipated. There are a number of different types of impact investments.

What are the core characteristics of impact investing? ›

Characteristics of impact investing

These four characteristics are (1) Intentionality, (2) Evidence and Impact data in Investment Design, (3) Manage Impact Performance, and (4) Contribute to the growth of the industry.

How do impact investors make money? ›

Impact-focused investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. By generating profits from an innovative business model, a company can pay financial returns to investors alongside doing something good for the world.

What is another word for impact investing? ›

In general, impact investing is an umbrella term and can be used as a broad synonym for ESG investing and socially responsible investing.

What are the benefits of impact investing? ›

Impact investing can help to reduce corruption

By helping to create jobs and boost economic growth, impact investing can play a significant role in addressing global challenges such as climate change and poverty.

What do impact investors do differently? ›

By definition, impact investing means doing something different. Traditional investors focus on financial returns; impact investors must make an intentional 'contribution' to measurable social and environmental outcomes.

What are the stages of impact investing? ›

The Impact Investing process typically starts during the pre-investment period by estimating the impact of the investee. The next step is planning for the impact, and this process is ideally done during the deal negotiation.

How do you evaluate impact investing? ›

Use quantitative evidence to asses impact potential: We use economic, scientific, and social science research to estimate a company's impact potential. Assess impact potential in due diligence: We assess impact of companies during live diligence, elevating it to be on par with estimates of financial return.

How much can you make in impact investing? ›

Impact Investing Salary in California
Annual SalaryHourly Wage
Top Earners$138,560$67
75th Percentile$90,089$43
25th Percentile$39,169$19

What are the top impact funds? ›

As of publication, the top five impact investing firms on the basis of assets under management (AUM) are Vital Capital, Triodos Investment Management, the Reinvestment Fund, BlueOrchard Finance S.A., and the Community Reinvestment Fund, USA.

How much money is in impact investing? ›

Global Impact Investing Network (GIIN)

The GIIN's 2022 market sizing report estimates the current size of the global impact investing market to be $1.164 trillion, revealing its considerable growth in recent years. Methodology for reaching this estimate is covered in Appendix 1.

What is the difference between ESG and impact investing? ›

Impact investing is more focused and deliberate in seeking investments with a specific social or environmental outcome. In contrast, ESG investing considers a company's ESG factors and traditional financial metrics. This is one of the main differences between ESG and Impact investing.

What is the difference between ESG based investing and impact investing? ›

While ESG investing operates as a framework to assess material risks and opportunities for firms, impact investing is an investment strategy that seeks to first and foremost create a specific, measurable social or environmental benefit.

What is the difference between ESG and impact investment? ›

The Difference between Impact Investing and ESG Investing

Impact investing focuses on achieving measurable and positive social or environmental outcomes, whereas ESG investing emphasises incorporating ESG factors into investment decision-making and risk management.

How do you measure impact of impact investing? ›

The method consists of six steps.
  1. Assess the Relevance and Scale. ...
  2. Identify Target Social or Environmental Outcomes. ...
  3. Estimate the Economic Value of Those Outcomes to Society. ...
  4. Adjust for Risks. ...
  5. Estimate Terminal Value. ...
  6. Calculate Social Return on Every Dollar Spent.


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