What is the difference between impact investments and socially responsible investments?
Impact Investments differ from socially responsible investments both in terms of the nature of the intent behind each, as well as the main investment vehicles used. Socially responsible investments (“SRI” funds, in the traditional sense) began as mutual funds that adopted a passive investment strategy that defines negative screening of companies to be excluded from an investment portfolio, based on specific criteria, or the business model deemed non-beneficial to society. The socially responsible investment portfolios are optimized for financial returns while avoiding negative social or environmental impact.
Impact investing, on the other hand, is an active strategy that seeks to finance organizations that produce clear social and environmental benefits. Impact investing could include either debt or equity investments, as well as hybrid instruments. Socentix helps the investors to consider the transaction and monitoring costs, as well as a way to reduce risk of not being able to recover the capital.
Who are the investors in this asset class?
Impact investors may include individuals, fund managers, institutional investors, or family offices that actively seek to allocate capital in a way that generates, not only financial, but also clear social and environmental returns.
Some impact investors, such as donors, see this asset class as an alternative to philanthropy. They prioritize impact and are willing to take fairly high risks, as they are not primarily focused on financial returns. Other investors are more focused on achieving financial return, while secondarily also achieving social and environmental benefits.
What are the expectations of financial return for these investments?
The main objective of the impact capital is to achieve social and environmental return while earning at least a moderate financial return. Ideally, a financing is structured (as debt vs. equity) in a customized manner.