CHAPTER 2

What Is Impact Investing?

Impact investing is aimed directly at creating a positive environmental or social impact by identifying and solving a particular environmental or social problem. Impact investing is an advanced stage of sustainable investing that began with the socially responsible investment movement that emerged in the 1970s and which was marked by the use of negative or exclusionary screening processes designed to avoid specific assets due to consideration of specific environmental, social, and governance (ESG) criteria including moral values (e.g., tobacco or gambling), standards and norms (e.g., human rights), ethical convictions (e.g., animal testing), or legal requirements (e.g., controversial armaments such as cluster bombs or land mines, excluded in order to comply with international conventions). The next stage was based on “best-in-class” (positive) screening, which contrasts significantly with negative screening and calls for investment and lending decisions to be made based on demonstrated high ESG performance of sectors, companies, or projects and adherence to minimum standards of business practice based on international norms relating to climate protection, human rights, working conditions, and action plans against corruption.

As time went by, investors began to use positive screening in a more focused manner by concentrating their activities on specific high-profile sustainability-related themes such as clean tech, infrastructure, affordable housing, energy-efficient real estate or sustainable forestry.¹ BNP Paribas (BNP) referred to the rise of social impact investing, sometimes referred to as social finance or solidary-based finance, which includes investments into projects that have a social focus and seek to address a particular social or environmental challenge such as housing problems caused by increased poverty, unemployment, environmental issues such as organic farming or clean energy and development of third world economies.2 Other drivers of maturation of the sustainable investment marketplace have included the development of new and emerging methodologies intended to systematically and explicitly include ESG risks and opportunities into traditional financial-based investment analysis and the growing role of “active ownership,” which focuses on engagement and dialogue with portfolio companies after an initial investment is made in order to influence ESG strategies and actions through exercise of ownership rights and being a visible activist for change.³

The term “impact investing” was coined by the Rockefeller Foundation in 2007 and today the most commonly used definition is the one proposed by the Global Impact Investment Network (GIIN) (https://thegiin.org/impact-investing/): “investing made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” A similar formulation was adopted by the G8’s Social Impact Investment Taskforce: “the defining characteristic of impact investment is that the goal of generating financial returns is unequivocally pursued within the context of setting impact objectives and measuring their achievement,” and the Taskforce also declared: “The world is on the brink of a revolution in how we solve society’s toughest problems. The force capable of driving this revolution is ‘social impact investing,’ which harnesses entrepreneurship, innovation and capital to power social improvement.”⁴ BNP has noted that impact investing, like microfinance and social impact bonds (i.e., bonds that are repaid upon maturation only if the social objectives of the project have been achieved), is focused on “social businesses,” which were described by BNP as being primarily social in nature but following viable economic models—in other words, a shared value concept that seeks both profit and social impact.5 As for what “impact” might be in this context, the term has been defined as “any meaningful change in the economic, social, cultural, environmental and/or political condition due to specific actions and behavioral changes by individuals, communities and/or society as a whole.”⁶

Impact investing has also been explained to include a range of investment opportunities that exist between traditional investing, which focuses on maximizing profits, and philanthropy, which has generally been undertaken to achieve environmental or social good with regard for financial returns. Singh explained that unlike traditional investing, which focuses only on financial data, sustainable investing (including impact investing) also considers and manages ESG metrics in order to generate long-term value and reduce risk.⁷ Impact investing has been aligned with the concept of venture philanthropy, which has been described as the application or redirection of principles of traditional venture capital financing to achieve philanthropic endeavors.⁸ According to Singh, venture philanthropy and impact investing comprise a broader category called “concessionary investing” that includes projects that produce social impact but only generating below-market expected financial returns. He notes that while this result may be satisfactory for certain types of impact investors, such as relatively inexperienced high-net-worth individuals, foundations or development agencies, banks and pension funds that need to deliver strong financial returns must engage in “non-concessionary investing,” an approach that has been criticized as steering asset managers too far away from ensuring real environmental and social impact and diverting capital away from social enterprises working on innovative market-based solutions in difficult contexts.

Impact investing has occurred in both emerging and developed markets and, as discussed above, the goals of impact investors in committing their capital and ancillary resources have ranged from market-driven risk-adjusted returns to concessional and capital preservation. Impact investing has occurred in a broad range of sectors including sustainable agriculture, renewable energy, conservation, and microfinance, and governments and private enterprises have turned to impact investing tools to address challenges that have arisen relating to the delivery of basic services such as housing, health care, and education to underserved individuals or communities.

The GIIN has identified the following core characteristics of impact investing9:

• Intentionality: Impact investors invest with the intent to have a positive social or environmental impact through their investments.

• Expectation of Financial Returns: Impact investments are not grants that do not need to be repaid: investors expect a financial return on their capital or, at minimum, a return of their capital.

• Range of Return Expectations and Asset Classes: Impact investments target financial returns that range from below-market to risk-adjusted market rate (two-thirds of the capital for impact investment seeks risk-adjusted market rates) and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.

• Impact Measurement: A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.

Similarly, Godeke and Briaud argued that the two key elements from the GIIN definition of impact investment are intention and measurement. As for intention, they explained that investors must have the intention to achieve both financial returns and positive social or environmental impact when making decisions about how their invested assets are to be used. An investment in a project such as electronic car manufacturing that is made solely with the intention to promote a positive social impact is important, but does not meet the standard of intention since the investor is not acting with the intent to achieve a financial return. As for measurement, investors must explicitly measure both the financial performance of their investments and the environmental and/or social impact of the investments, which is admittedly a challenge given that measurement tools for environmental and/or social impact have yet to develop to the level that investors have come to expect for gauging financial returns. Godeke and Briaud pointed out that enterprises launched to pursue an environmental or social purpose and goals can, and often do, benefit from the support of both impact investors (as defined above) and other investors that do not fall within the definition because they are only interested in a financial return or impact.10 They also noted that some impact investors use another variable that has been referred to as “contribution,” or “additionality,” and which is a kind of “but for” question that asks whether a particular investment will cause “an increase in the quantity or quality of the enterprise’s social outcomes beyond what would have otherwise occurred.”11

The GIIN has noted that since impact investing is a relatively new term, used to describe investments made across many asset classes, sectors and regions, it has been challenging to develop a rigorous methodology for estimating the total size of the market. The GIIN has been working to strengthen its database and methodology and released its 2020 Annual Impact Investor Survey that included an estimate that over 1,720 organizations were managing $715 billion in impact investing assets under management (AUM) as of the end of 2019.¹² Established companies have been compelled to respond to calls by institutional investors to incorporate responsible ESG initiatives into their business models as a condition to continued support in public capital markets. Other companies seeking to demonstrate to impact investors their commitment to environmental and social responsibility have opted for emerging forms of legal entities, so-called social enterprises, which explicitly incorporate sustainability and multistakeholder interests into their governance and reporting frameworks.

Impact investing has been characterized as an attempt to incorporate an evidence-based mechanism for measuring accountability into giving, a move driven by the evolution of philanthropy from charitable giving from foundations and philanthropists to development financial corporations, multilateral banks, and impact-focused asset managers.¹³ Impact investment is the smallest by assets among the various categories of sustainable financing, but it has attracted a lot of attention in recent years and is perceived to be the most ambitious of all of the strategies. A project is only suitable for impact investment if it is feasible to quantify and measure its precise environmental and/or social impact (e.g., the reduction in the volume of carbon dioxide emitted during the course of the company’s operations or the number of girls within a certain age group that gain access to education in a particular village).14

In the early days of impact investing only small, niche firms participated; however, the last few years has seen a dramatic rise in interest among larger players such as BlackRock, Goldman Sachs, Bain Capital, and TPG, all of which have launched funds or offered other opportunities to investors focused on ESG.¹⁵ A wide range of individual and institutional investors that have entered the impact investment marketplace including fund managers, development finance institutions, diversified financial institutions/banks, private foundations, pension funds and insurance companies, private funds, hybrid funds, ethical banks, microfinance institutions, social stock exchanges, crowdfunding, government institutions, family offices, individual investors, nongovernmental organizations (NGOs) and religious institutions. Continued growing enthusiasm can be expected given that feedback from investors indicated that portfolio performance has generally met or exceed their expectations for both social and environmental impact and financial return; however, access to capital from impact investors may be limited for companies that lack scalable high-quality investment projects.

Global Impact Trends and Initiatives

While, as mentioned above, the term “impact investing” was first used and popularized in 2007 by the Rockefeller Foundation, the concept of integrating nonfinancial values and goals into investing has a long history. Some of the events highlighted in a short “modern history of impact investing” include the launch of the first socially responsible investment mutual fund by Pax World in 1971; the launch of the Forum for Sustainable and Responsible Investment in 1984; the issuance of the Brundtland Report Our Common Future in 1987, which provided the foundation for what has become the “sustainable development” movement; the creation of what is now called the MSCI KLD 400 Social Index in 1990; the introduction of the UN Principles for Responsible Investment (unpri.org) in 2006; and the launch of GIIN in 2009.¹⁶ Over the last decade impact investing has continued to emerge and evolve amid a range of global economic, social, and political trends and initiatives intended to create a legal and regulatory framework within which impact investing can be conducted. Examples include the following:

• Maryland was the first state in the United States to pass “benefit corporation” legislation in 2010 and since then a majority of the states and the District of Columbia have adopted statutes that permit the formation of this new form of for-profit corporation that explicitly expands the fiduciary duties of directors beyond maximizing shareholder value, which has been the traditional standard of corporate governance, to include consideration of whether or not the corporation’s activities have an overall positive impact on society, their workers, the communities in which they operate, and the environment.¹⁷ Benefit corporations have been formed to explicitly pursue and produce a particular public benefit, such as promoting education in the community, and have opted to be accountable for their actions through disclosure requirements and external verification.

• Companies interested in publicly demonstrating their commitment to creating a positive environmental and social impact and being held accountable for their actions can seek to become a “Certified B Corporation” by fulfilling the requirements established by B Lab Company (B Lab), a Pennsylvania nonprofit corporation. In order to become “certified” a company must achieve a minimum verified score on a “B Impact Assessment” that covers financial performance; suppliers; the impact of the business on all its stakeholders; best practices regarding mission, measurement, and governance; and the company’s “impact business model.”

• Governments, companies, investors, and stakeholder representatives now operate in world that is full of transnational, voluntary standards for what constitutes responsible corporate actions, including standards that have been developed by states; public/private partnerships; multistakeholder negotiation processes; industry sectors and companies; institutional investors; functional groups such as accountancy firms and social assurance consulting groups; NGOs and nonfinancial ratings agencies. Notable examples include the UN Global Compact, OECD Guidelines for Multinational Enterprises, and the UN Sustainable Development Goals (SDGs), each of which include goals and/or indicators relating to businesses’ environmental and social impacts.

• It is now widely acknowledged that best practices relating to the implementation of effective sustainability practices must include a commitment to transparency and reporting on sustainability-related activities and impacts to the organization’s stakeholders. In addition, sustainability is like any other important strategic initiative and should be carried out pursuant to a formal sustainability management system and process that includes due diligence, development, and implementation of strategic and operational goals and plans, monitoring, and assessment of impacts overseen by the members of the governing body of the organization. Investors have come to expect, if not require, that their portfolio companies commit to adherence to one or more of the widely used sustainability-related standards that specifically address reporting and management such as the Global Reporting Initiative (www.globalreporting.org); the International Integrated Reporting Framework (integratedreporting.org); the Sustainability Accounting Standards Board standards (www.sasb.org); and the standards of the International Organization for Standardization relating to environmental management (ISO 14001) and social responsibility (ISO 26000).

• Securities exchanges and regulators have a long history of intervening in the capital raising process through the imposition of rules relating to corporate governance and the last two decades has seen a surge in regulatory initiatives around the world seeking to better integrate corporate governance and sustainability. For example, the European Union (EU) has implemented a directive that requires nearly 7,000 large companies and “public interest organizations,” such as banks and insurance companies, to “prepare a nonfinancial statement containing information relating to at least environmental matters, social and employee-related matters including diversity, respect for human rights, anti-corruption and bribery matters” and individual countries in the EU have their own additional requirements (e.g., France requires listed companies to disclose their impact on social and environmental issues in their annual reports and accounts).¹⁸ In addition, several stock exchanges around the world require social and/or environmental disclosure as part of their listing requirements including exchanges in Australia, Brazil, Canada, India, Singapore, South Africa, and the London Stock Exchange.19

• Asset managers and financial institutions have responded to the demands of their own investors for more accountability with respect to the environmental and social impacts of investment decisions by committing to relevant voluntary standards such as the UN Principles for Responsible Investment and the Equator Principles. Also, pension funds in countries such as Australia, Belgium, Canada, France, Germany, Italy, Japan, Sweden, and the UK are required to disclose the extent to which the fund incorporates social and environmental information into their investment decisions.²⁰

• Aligned with the recognition of benefit corporations based on the premise that directors owe fiduciary duties to all of the stakeholders of the business has been the steady call for the redefining the “purpose” of the corporation as being not solely about profit, but also about public purposes that relate to the company’s wider contribution to public interests and societal goals.²¹ In 2019 a group of 181 CEOs who were members of the Business Roundtable signed a statement that redefined the purpose of a corporation to include not only improving shareholder value, but also investing in employees, protecting the environment and dealing ethically with other stakeholders such as suppliers. All this has met that a brighter light will be shined on identifying and measuring the environmental and social impacts of the operations of companies.

• In Europe, several legal initiatives have been launched to support expansion of sustainable finance and impact investment including a taxonomy for sustainable economic activities to facilitate the creation of standards that can be referenced to determine whether economic activity qualifies as environmentally sustainable; adoption of requirements on investment managers to disclose how they have considered sustainability issues that materially affect an investment’s value and an investment’s broader societal impacts; and introduction of requirements that must be satisfied in order for financial products to be labeled “green” or “sustainable.” These initiatives, and others, are essential to the success of the EU’s plans for an EU Green Deal announced in December 2019.

• While the United States has been slower than other parts of the world to regulate with respect to ESG-related disclosures, there has been growing pressure on the Securities and Exchange Commission to establish a better ESG reporting framework for public companies, and legislation has been introduced at the federal level to support the development of clearer ESG metrics and reporting by public companies of their analysis and assessment of the impact of ESG factors on their businesses.22 States such as Illinois now require public or governmental agencies that manage public funds to implement sustainable investment policies for those funds.23 States have also passed laws to address specific social issues such as requiring gender diversity in the boardrooms of public companies.

In addition to the trends described above, the impact investing community, like society at large, must now grapple with the fallout from the COVID-19 pandemic and the events that triggered the large-scale protests in the United States and around the world relating to racial injustice. While the COVID-19 pandemic has created an economic shock that will likely take years to overcome, significantly increasing financial risks and uncertainties for investors, it seems clear that impact investors can play an important role in responding to the pandemic by supporting businesses and the reform and strengthening of major social systems in crucial areas such as health, education, community development, and housing. The CEO of the Soros Economic Development Fund declared the pandemic to be a “seminal test for the impact investment field,” and the CEO of GIIN called impact investing “more important than ever” and said that the pandemic was a time for impact investors to “lean into the moment.” The chief policy officer of the Global Steering Group for Impact Investment said, “The way we tackle the recovery phase will shape whether we’re moving to a new economic order with impact at the center.”24 The GIIN launched the Response, Recovery, and Resilience Investment Coalition, the “R3 Coalition” to streamline impact investing efforts to address the large-scale social and economic consequences of the COVID-19 pandemic and accelerate impact investments to respond, recover, and build resilience in the face of the pandemic. With respect to the role of impact investors in addressing systemic racism, 128 institutional investors signed on to a statement issued by the Racial Justice Investing (https://racialjusticeinvesting.org/) coalition that recognized that the investor community had contributed to, and benefited from, racist systems and the entrenchment of white supremacy, and the signatories committed “to hold ourselves accountable for dismantling systemic racism and promoting racial equity and justice through our investments and work” and review their portfolio holdings in order to identify investments that reinforce systemic racism, and to either engage with or divest from those companies.²⁵

Impact Ecosystems

There are a number of players involved in identifying, planning, implementing, and measuring an impact investing initiative. One way to understand the process is to follow the “impact capital chain” described by Godeke and Briaud.²⁶ The chain begins with the asset owner, the party that holds the capital and is responsible for deciding on an investment orientation that will ultimately drive how the capital is allocated along the chain. There are a wide range of asset owners, each with their own perspectives, including retail investors, institutional endowments, private foundations, and sovereign wealth funds. The next stages of the impact capital chain are as follows:

• Intermediaries: Intermediaries are entities that act as a bridge between two parties in a financial transaction, such as commercial banks, investment banks, and investment funds. Two distinct types of intermediaries in the impact capital chain are “advisors,” who provide advisory services to asset owners on how to deploy their assets in exchange for fees (some advisors also offer their own investment products), and “asset managers,” who develop and sell products on behalf of others to meet the investment goals of asset owners.

• Enterprises: Enterprises are the entities, which can include nonprofits, for-profits, and hybrid structures such as benefit corporations, which actually receive the capital and are held accountable for deploying the capital in a way that fulfills any promised impact and financial return.

• Customers/Beneficiaries: While the enterprise receives and deploys the capital, the impact, both positive and negative, is ultimately experienced by the customers and other beneficiaries of the enterprise’s activities. Enterprises may have a diverse range of beneficiaries including not only their own customers and employees but also members of the communities in which they operate and employees and communities in their supply chains. Asset owners need to establish their own chains of communications with all of these stakeholders through engagement in order for the owners to incorporate stakeholders’ views into their asset allocation decisions and assess impact on their own, rather than relying solely on reports from the enterprises.

Asset owners must also be mindful of other stakeholders that provide an enabling environment for activities carried out through the impact capital chain. These include regulators from the public sector and policymakers from the nonprofit sector, each of which play a significant role in identifying the needs of beneficiaries, structuring the operations of enterprises, and defining the range of potential investment returns for impact investment projects. As noted elsewhere in this chapter, lawmakers can create tools that are exclusively within their domain, such as tax incentives, to support impact investment. At the same time, decisions by elected officials on which projects and communities to favor with their incentives will obviously influence how asset owners are able to deploy their capital. Nonprofits with long-standing and trusted relationships in their communities can assist in asset owners in completing stakeholder analysis during the due diligence process so that asset owners can set appropriate goals and performance metrics with the enterprises that will be receiving the capital. The number of accelerators and incubators operating the impact investment arena has also increased significantly, which will hopefully mitigate risk, expand the range of available investable opportunities, and improve capacity and knowledge among prospective enterprise managers.27

A comprehensive ecosystem of associations, conferences, research efforts, advisors, and consultants has developed around the world in response to the growing interest in impact investing.²⁸ For example, standardization of measurement of environmental and social impact is obviously a crucial issue and concern and efforts in that area have included the Impact Reporting and Investment Standards IRIS; (iris.thegiin.org), a catalog of generally accepted metrics that measure social, environmental, and financial performance in an effort to support transparency, credibility, and accountability in impact measurement practices; the Global Impact Investing Ratings System, explained to be a comprehensive and transparent system for assessing the social and environmental impact of developed and emerging market companies and funds with a ratings and analytics approach analogous to Morningstar investment rankings²⁹; the standards developed by the Sustainability Accounting Standards Board (www.sasb.org), a US-based independent standards-setting organization for sustainability accounting standards that was incorporated in July 2011 to meet the needs of investors by fostering high-quality disclosure of material sustainability information; and B Impact Assessment (https://bimpactassessment.net/), a free online assessment tool powered by B Lab that allows companies to measure their impact on their workers, communities, and customers and on the environment and compare the results to their peers and prepared a customized improvement plan.³⁰

Advocacy organizations for impact investing have proliferated as part of a concerted effort to promote impact investing and develop standards responsive to the concerns of the marketplace. The Principles for Responsible Investment mentioned above are a voluntary and aspirational set of investment principles developed by an international group of institutional investors, for investors, through a process convened by the UN Secretary-General that offer a menu of possible actions for incorporating ESG issues into investment practice. The organization built around the principles has become the world’s leading proponent of responsible investment and works to understand the investment implications of ESG factors and to support its international network of investor signatories (over 3,000 as of 2020, up from 100 when the Principles were launched in 2006) in incorporating these factors into their investment and ownership decisions. The International Finance Corporation (IFC) adopted a Sustainability Framework in 2006 and updated the Framework as January 1, 2012, to promote sound environmental and social practices, encourage transparency and accountability, and contribute to positive development impacts. The IFC’s Performance Standards, which are part of the Sustainability Framework, have become globally recognized as a benchmark for environmental and social risk management in the private sector. The Sustainability Framework also includes a Policy on Environmental and Social Sustainability, which defines the IFC’s commitments to environmental and social sustainability.

The GIIN, also mentioned above, calls itself the global champion of impact investing, dedicated to increasing its scale and effectiveness around the world and carries out its work through support for development of industry networks, industry events, tools, and resources for impact measurement and management, training programs for impact investors and asset managers and industry research, market data, and publications. The International Capital Market Association (icmagroup.org) is a selfregulatory organization and trade association for participants in the capital markets that has identified the role that scaling up the financing of investments that provide environmental and social benefits will have on the transition to a sustainable global economy and sought to take the lead in this effort by championing the development and implementation of the Green Bond Principles, the Social Bond Principles, and the Sustainability Bond Guidelines as the leading framework globally for issuance of green, social, and sustainability bonds. The Impact Management Project (impactmanagementproject.com) is a forum of impact management professionals from over 2,000 organizations that has been collaborating on building a consensus on how to measure, compare, manage, and report impacts on environmental and social issues.³¹ The Forum for Sustainable and Responsible Investment (https://ussif.org/) refers to itself as the nonprofit hub for the sustainable, responsible, and impact investment sector in the United States and provides research, consulting, policies, media, training, national conferences, and local events to members with more than $3 trillion in AUM or advisement.

Consistent with the development of voluntary standards and instruments relating to other sustainability-related topics, industry-specific organizations and initiatives have been launched to promote impact investing, measurement, and reporting in specific industries. For example, the widely recognized Leadership in Energy and Environmental Design (LEED) green building certification program was developed by the nonprofit US Green Building Council and is now used worldwide as a rating system for the design, construction, operation, and maintenance of green buildings, homes, and neighborhoods. The Forest Stewardship Council (FSC) (fsc.org) is a multistakeholder initiative focused on the promotion of environmentally sound, socially beneficial, and economically prosperous management of the world’s forests and currently operates in more than 80 countries, wherever forests are present. FSC certification ensures that products come from responsibly managed forests that provide environmental, social, and economic benefits. The FSC claims to be the world’s strongest certification system, in terms of global reach, robustness of certification criteria, and number of businesses involved in the system. Fairtrade International (FI) (fairtrade.net), a nonprofit multistakeholder association that seeks to change the way trade works through better prices, decent working conditions, and a fairer deal for farmers and workers in developing countries, sets the Fairtrade Standards (www.fairtrade.net/standards), which are the requirements that producers and the businesses who buy their goods have to meet for a product to be Fairtrade certified. The Fairtrade Standards ensure fairer terms of trade between farmers and buyers, protect workers’ rights, and provide the framework for producers to build thriving farms and organizations.³²

Who Are Impact Investors?

It is common to classify impact investors by how they balance impact and financial returns when constructing and executing their investment strategies. For example, Mac Cormac et al. noted that there are three classes of impact investor33:

• “Impact-First” or “Impact-Only” investors, typically charitable foundations, who prioritize impact over financial returns either relatively or absolutely (also known as “concessionary capital”)

• “Impact and Return” investors who place approximately equal priority on impact and financial returns

• “Return-First” investors who are focused primarily on market rate financial returns but seek impact as an ancillary benefit of their investments

They pointed that an investor may allocate funds among multiple vehicles falling into different classes, such as when an investor forms and operates both a for-profit investment vehicle and a nonprofit foundation that pursue the same mission but with different levels of return risk.

According to the GIIN, impact investing has attracted a wide variety of investors, both individual and institutional, including fund managers, pension funds/insurance companies, development finance institutions (DFIs), banks and diversified financial institutions, foundations, family offices, individual investors, NGOs, and religious institutions.³⁴ The GIIN’s 2019 Annual Impact Survey, which collected and analyzed information from 266 respondents on impact investment activities and perspectives on industry development, found that two-thirds of the respondents identified as fund managers; a majority of respondents were headquartered in developed markets, most commonly the United States and Canada (45 percent) and Western Europe (27 percent); two-thirds of respondents made only impact investments and the remaining third also made conventional investments; about two-thirds of respondents principally targeted market-rate returns and remaining third were split between those targeting returns closer to market rate and those targeting returns closer to capital preservation; 56 percent of respondents targeted both social and environmental impact objectives, 36 percent targeted only social objectives, and 7 percent targeted only environmental objectives; and that respondents allocated capital globally with about half of the total assets allocated to emerging markets and the other half to developed markets.35

Impact investors enter the marketplace from a number of different paths and each come with their own unique set of motivations and goals with respect to financial return and environmental and social impact. Financial goals are realized through the use of traditional investment criteria such as risk, diversification, liquidity, and the time horizon that meet the particular needs of the investor and, in some cases, the investor’s donors or clients. Impact goals are the new piece of the puzzle for impact investors and may be based on a variety of factors such as heritage, family, faith, legacy, or experience.³⁶ According to Godeke and Briaud, common reasons for pursuing impact investment include engaged ownership through alignment of all of the investor’s assets with the personal values or organizational mission of the investor with respect to social and environmental impact; addressing the root causes of environmental and social problems; reconfiguring and reinventing the entire economic system including shifting corporate behavior, changing the incentives of financial managers and CEOs or adding regulation to drive corporate responsibility; and advancing a particular cause by focusing investing on a specific place (e.g., community-based foundations supporting local causes and projects), people (e.g., support for projects that specifically take into consideration ethnicity, race, age and/or income), or institution/institutional type (e.g., startups, community colleges, nonprofits etc.).37

Mac Cormac et al. noted several important trends in the impact investment sector as it entered the 2020s. First, foundations are allocating larger portions of their endowments to impact investing and shifting their investment strategies to include greater emphasis on making program-related impact investments. In some cases, nonprofits are establishing their own wholly owned investment funds to invest only in projects that further the nonprofit’s tax-exempt purpose. Second, investment managers overseeing the assets for wealthy individuals and families, so-called family offices, are no longer relying strictly on the use of private foundations, which are restricted in the way that assets can be invested due to tax considerations, and are instead creating impact-first fund structures (or investing in impact-first fund structures managed by others). Third, there is growing interest in the use of “hybrid funds,” which are funded by both for-profit and nonprofit investors and are often structured as an integrated combination of for-profit and nonprofit entities. Fourth, managers of forprofit funds are accommodating the interests of their investors in impact investing by establishing affiliated entities, referred to as “side cars,” which focus on impact-related investment opportunities. Finally, traditional private equity investors are demonstrating more interest in impact investing.³⁸

Impact investors must determine the appropriate balance between their financial and impact goals (i.e., how influential their impact goals will be in determining their investment decisions) and “impact risk,” which goes to the level of uncertainty surrounding whether an investment will achieve the desired impact.³⁹ It is often explained that impact investors must find their place along a spectrum of intentions regarding the outcomes of their investment strategies, since intention to generate measurable social impact alongside financial return is the defining principle of impact investing. At one extreme is traditional investing with performance measured only by financial return. At the other extreme is traditional philanthropy with performance measured by environmental and/or social impact only. Impact investors can enter the spectrum at different points between these extremes and change their strategies as they gain future experience. For example, the first steps away from “Return Only” have been characterized as a “Return First” approach and include adding an ESG screen to an existing investment (e.g., evaluating prospective investments in public companies based on ESG criteria and their commitments to corporate social responsibility) and/or committing to a thematic market-rate investment in a for-profit enterprise. The next step down the spectrum is focusing intention on impact ahead of finance through an equity investment in a benefit corporation or a local bank known for supporting community development projects, a loan to a nonprofit at below-market interest rates or investing in a microfinance fund that works with entrepreneurs in developing countries.40

Impact investors also tend to organize their investment portfolios around impact themes and lenses. Impact themes include specific industry sectors and/or issues and examples include climate change, community development, education, energy and resources, health and wellness, social enterprises, social justice, sustainable development, and agriculture and water. Many impact investors are selecting themes that are aligned with one or more of the SDGs, such as affordable and clean energy (SDG 7).⁴¹ Sub-themes may be used to narrow the focus within a broader topic, such as impact investors with a particular interest in earlychildhood development within the larger thematic universes of education and health and wellness. An impact lens refers to a specific view or perspective that an impact investor applies when making decisions regarding the composition of the investor’s impact investment portfolio. For example, an impact investor that applies a racial equity lens will focus on how a particular investment opportunity intends to impact the underlying conditions of racial equity, and gender lens investors are interested in how gender impacts all stages of the value chain including leadership and board gender balance; workforce composition and policies and practices relating to recruitment, promotion, pay equity, parental leave and flexible work, and prevention of sexual harassment; supply chains and products and services.42 Other examples of impact lenses include climate, creative economy, diversity, inequality, and inclusiveness and refugees.⁴³

According to Godeke and Briaud, the process of considering investment and impact goals and selecting the impact themes and lens that are of the greatest interest to them leads impact investor to develop their own unique “theory of change,” which they described as an articulation of the intended changes for people, issues and systems arising out of the investor’s asset allocation decisions. The components of a theory of change are aligned with emerging frameworks for reporting on impact investing and include the following⁴⁴:

• Inputs: Inputs are the financial and nonfinancial resources that are deployed in service of a certain set of activities and may include the amount and type of capital (and the form of instrument through which that capital is provided), networks, time, and passion.

• Activities: Activities include the actions that are performed in support of specific impact goals and objectives such as the delivery of products and services.

• Outputs: Outputs are the immediate and direct tangible practices, products and services that result from the activities undertaken using the inputs and include what is delivered, to whom, when and how. Examples of outputs include the number of products or units that are sold, the number of users that are reached and information on the demographic characteristics of the direct beneficiaries of the activities.

• Outcomes: Outcomes are the short-term and medium-term changes, or effects, on individuals, groups, or issues (e.g., the environment) that are directly or indirectly related to the outputs from the activities undertaken using the inputs. Examples of outcomes include demonstrable improvements in the targeted health behaviors of individuals or groups or reduction in household-level economic poverty in the community in which the activities have been conducted.

• Impacts: Impacts are the long-term changes, or effects, achieved for populations, issues or systems due to the outcomes that have been achieved. Examples of impacts include shifts in behaviors or patterns for multiple population groups or reduction in poverty levels at the regional or national levels. When feasible, the nature of the contribution from investments relative to other inputs and influential factors should be specified.

• Assumptions: Assumptions include a description of what the investor believes to be true regarding the context in which the activities are conducted and the outcomes and impacts are being pursued and should be based on evidence and/or actual experience and take into account other influential inputs and factors across the various levels mentioned above.

It has been suggested that participants in the impact investment market do so, at least partially, to cope with what has been referred to as the “philanthropic paradox,” meaning that investors engage in philanthropy and impact investment as a way to address and solve problems that they may have created during the course of the activities that led to their accumulation of wealth. For example, the Sackler family, which includes the founders and owners of the Purdue Pharma, a pharmaceutical company that has been widely criticized and sued for its role in the overprescription of drugs such as Oxycontin that has contributed to the North American opioid crisis, has given generous philanthropic gifts to leading institutions such as Yale University, the Guggenheim Museum, and the Serpentine Gallery to the Royal Academy in Britain. The Rockefeller family has used the wealth created from oil producing, transporting, refining, and marketing to combat the adverse impacts of these activities in the form of climate change.45 While such efforts are certainly laudable and have often contributed to improving the lives of large numbers of people, critics continue to question how much praise should be given while progress on reducing and eventually eliminating the harm from operational activities remains slow and dismiss gaudy donations to museums and other institutions accessible to a small privileged group as “reputation laundering”. Moreover, it is reasonable to expect that the Sacklers focus their wealth transfers on initiatives more closely connected to the harm they have caused, such as drug rehabilitation centers.

Another way to look at impact investing is as a means for bringing together the tools and disciplines of investment, philanthropy, and policy to generate more environmental and social benefits than would be created if these individual tools were not combined. Each of the nonprofit, public and private sector enterprises have their own unique structural characteristics, processes, and accountabilities that must be taken into account and which make collaboration problematic in many instances. For example, nonprofits depend on their donors for support; however, those donors may not have the same incentives as the persons and groups that are the intended beneficiaries of the organization’s activities (i.e., the stakeholders). Public agencies and officials must act in accordance with agendas and budgets established by elected officials who are responding to the sentiments of voters, which often makes working with the private sector difficult. Private companies have traditionally been built and operated to achieve profit maximization for the benefit of their shareholders and have often escaped responsibility for the negative externalities of their activities. Impact investing, properly structured, draws on the specific strengths from each of the three sectors and combines them effectively to create environmental and social benefits utilizing the distinct institutional elements of each sector. One example offered by Godeke and Briaud was an impact investment project to address a need initially identified in the public sector: affordable housing. In order to effectively achieve the social benefits from the project, the public sector contributed policy tools such as tax incentives, the nonprofit sector provided the experienced gained from developing similar projects (including its skills and competencies in engaging with the beneficiaries of the project in the local community), and the commercial investors from the private sector established the goals and performance metrics to ensure that the project was completed on a timely basis and designed to fulfill both social and investment objectives.46

According to the Survey, respondents made over 13,000 deals in 2018 and planned to make more than 15,000 deals in 2019. The average deal size in 2018 was $2.6 million and most of the investment activity as a percentage of AUM fell into one of three categories in the following order: growth-stage companies, mature, publicly traded companies, and mature private companies. The Survey noted that while less capital was invested in venture and seed/startup stage companies, this could likely be attributed to the fact that such companies require less capital and did not necessarily reflect a lack of interest in such companies among investors. In fact, more than half of the respondents had invested in venture-stage startups and 35 percent of the respondents had supported seed/startup stage companies.⁴⁷ In general, the survey respondents seem satisfied with the performance of their investments, reporting that it was in line with both financial and impact expectations, and indicated a commitment to developing the impact investment industry through various contributions including sharing best practices for impact measurement and management, supporting the development of businesses focused on impact, training finance professionals, and implementing policies and practices that advanced representation in the investment process of a range of stakeholders in addition to shareholders.48

Not surprisingly, a significant percentage of the respondents to the GIIN’s 2019 Annual Impact Survey reported that impact measurement and management were central to their goals and practices, which are defined by investors’ deliberate pursuit of positive, measureable social or environmental impact. Eighty percent of the respondents indicated that desire to work for a mission-driven organization motivates their staff, and 79 percent indicated that their staff members are interested in aligning their careers with their personal values. At the organizational level, more than 80 percent of the respondents confirmed that they made impact investments because they were part of their commitment as responsible investors and intentionally pursuing impact was central to their mission. The GIIN has observed that impact investing challenges the long-held views that environmental and social issues should be addressed only by philanthropic donations and government aid, and that market investment should focus exclusively on achieving financial returns. The diverse and viable opportunities for both impact and financial return in the emerging and evolving impact investment marketplace have been a catalyst for motivating investors to participate. Examples provided by the GIIN include the following: banks, pension funds, financial advisors, and wealth managers have been able to provide new investment opportunities to both individual and institutional clients with an interest in general or specific environmental and/or social causes; Institutional investors, family offices, and foundations can leverage significantly greater assets in the impact investing marketplace to accelerate advancement of their core environmental and/or social goals, while maintaining or growing their overall endowment; and governmental entities acting as investors and DFIs can provide proof of financial viability for private-sector investors while targeting specific social and environmental goals.49

Impact measurement is key to the viability and progress of the impact investment market and the respondents to the GIIN’s 2019 Annual Impact Survey reported that impact measurement was almost universally practiced and that they typically relied on a mix of qualitative information, proprietary metrics, and metrics aligned to IRIS or other standard frameworks.⁵⁰ One particularly interesting finding from the survey was that more than 60 percent of investors specifically tracked their investment performance to impact themes aligned to the SDGs, the most common ones being decent work and economic growth, no poverty, reduced inequalities, and good health and well-being. Aligning performance measurement with the SDGs is consistent with the overall profile of investors’ motivations for making impact investments since over half of the respondents to the survey indicated that they saw impact investing as a good path to contributing to the global agenda on environmental and social responsibility that included the SDGs.

Considerations for Recipients of Impact Investment

Companies now operate in an environment in which more and more capital providers are taking sustainability issues into consideration when deciding whether to fund a particular company or project and this means that the entire board of directors needs to understand how the company’s ESG-related strategies, principles, and practices can impact the company’s access to capital and the stability of its relationship with investors and bankers. An additional consideration is measurement and reporting of ESG-related performance, a topic that must be consider by several boardlevel committees such as the audit, finance, disclosure, and corporate social responsibility committees. Measurement and reporting techniques are evolving and differ across jurisdictions; however, there are emerging standards that need to be understood as more investors and lenders rely on sustainability and ESG reporting for collecting information necessary for them to make decisions about allocating their capital.

When reviewing and approving the company’s financial strategies and specific capital projects board members need to be mindful of the various factors that motivate investors and decision makers to incorporate sustainability aspects into their investment and lending decisions51:

• Many investors and lenders take sustainability issues into consideration in order to make better risk management decisions, avoid future financial issues and make better long-term investment and lending decisions. Investors and lenders are increasingly skittish about funding companies and projects that carry high legal and reputational risks due to concerns about compliance with applicable laws and regulations and ESG norms and standards.

• A growing number of investors and lenders are focusing on sustainability as a means for uncovering promising new business opportunities and undervalued assets. Companies that can offer investors and lenders a path to participate in financing innovative solutions to environmental and/or social problems can tap into new pools of capital.

• Investors are taking a more values-driven approach to funding decisions and avoiding investment in companies or projects considered to be “unethical” and/or which are likely to cause environmental or social harm. At that same time, these investors are proactively seeking out projects that have a demonstrable positive environmental or social impact.

• Certain investors, as well as shareholder activists, are interested in applying pressure on companies to change their behavior with respect to operational activities that have adverse environmental and social impacts (e.g., threatening to withhold or withdraw capital unless companies cease to engage in activities considered to be unsustainable).

• Some investors, like consumers, enjoy being associated with “good causes” and are therefore driven to invest in companies that have a good reputation with respect to ESG matters as a means for embellishing their own social identity.

For lenders, as opposed to investors seeking attractive risk-adjusted returns in addition to recovery of their original capital, ESG issues appear in their reluctance to enter into loan transactions that might ultimately involve them in financing controversial activities and/or projects that are overexposed to identifiable environmental or social risks and potential liabilities. Lenders are not only concerned about the possibility that ESG issues for the parties to whom they lend may impact their ability to repay but also fear reputational damage from being associated with such borrowers and their environmentally harmful and/or unethical practices. Many lenders follow an approach similar to the negative/exclusionary screening described above.52 At the same time, however, lenders are themselves interested in enhancing their sustainability reputations and are adopting various types of positive screening and ESG integration methodologies into their loan analysis and proactively seeking qualified borrowers in the areas of interest to thematic sustainability investors.

Directors need to understand the role that investors and lenders can play in impacting the future structure of the economy and, in turn, the influence that the priorities of investors and lenders can have on the business and financial strategies of their potential portfolio companies. This means making various adjustments to the how the board approaches some of its traditional duties and responsibilities. For example, companies are being urged to move beyond conventional net present value analysis of projects to implement sustainable asset valuation and capital budgeting techniques such as analyzing projects based on “net present sustainable value,” which has been described as estimating “the net present value added across financial, environmental and social dimensions using a required rate of return that considers not only investors’ opportunity cost for their financial capital, but also the opportunity costs of the environmental and social capital inputs.”53 With respect to capital budgeting, analysts are beginning to favor in incremental savings of water, energy, and waste.

Another transition necessary for companies to take advantage of sustainable financing opportunities is shifting toward reporting and disclosure that includes ESG matters, particularly when companies are seeking targeted financing for projects based on renewable energy, climate change action, community, and economic development and natural resource conservation and management. Oversight of insurance matters by the board must take into consideration the evolving needs of insurance companies to mitigate their exposure to sustainability-related risks (e.g., natural disasters, ecosystem, and community damage from operational activities and litigation costs associated with claims from employees based on hazardous work conditions and/or consumers based on issues with defective and/or hazardous products).

The Future of Impact Investing

As for the overall state of the impact investing market, the respondents to the GIIN’s 2019 Annual Impact Survey noted that significant progress had been made over the prior year with respect to research on market activity, trends, performance, and practice, as well as in the sophistication of impact measurement and management practice and the availability of professionals with relevant skill sets. However, the respondents expressed concerns about several challenges to further progress such as a lack of appropriate capital across the risk/return spectrum, a lack of high-quality investment opportunities with track records and a lack of suitable exit options.⁵⁴ A Case Foundation publication issued in October 2015 suggested that growth of impact investing required additional work on a robust pipeline of investable deals, better data on business and fund performance, expanded opportunities for exits and the return of capital, actionable research on impacts and outcomes, and more products and easier “on ramps” for investors to get started.55

Ideas for the path forward for the continued development of the impact investing market and ecosystem have been collected in the GIIN’s Roadmap for the Future of Impact Investing: Reshaping Financing Markets, which was produced by roughly 350 stakeholders engaged by GIIN in order to suggest both a vision for more inclusive and sustainable financial markets and articulate a plan for the future progress of impact investing. The Roadmap details the following six categories of action to drive progress toward the vision⁵⁶:

• Strengthen the identity of impact investing by establishing clear principles and standards for impact investing and sharing best practices for impact measurement, management, and reporting

• Change the paradigm that governs investment behavior and expectations about the responsibility of finance in society via asset owner leadership, alignment of incentives with impact and updated fundamental investment theory

• Design tools and services that support the incorporation of impact into the routine analysis, allocation, and deal-making activities of investors (e.g., develop ratings for impact and build analysis and allocation tools that incorporate risk, return and impact)

• Develop products suited to the needs and preferences of the full spectrum of investors, from retail to institutional and of various types of investees, commit capital to emerging fund managers, and advance blended-finance vehicles

• Increase supply of trained investment professionals and pipeline of investment-ready enterprises focused on impact through targeted professional education (both graduate education and professional training and certification) for both finance professionals and business managers

• Introduce policies and regulation that both remove barriers and incentivize impact investments including clarify fiduciary duty, establish tax incentives for impact investments and create an environment conductive to impact investing

The Roadmap categories were developed to emphasize three priorities that must be addressed in order for the impact investing industry to continue to grow: prove feasibility at scale (i.e., demonstrate progress against environmental and social challenges and the ability to generate satisfactory financial returns for investors across a range of risk-return appetites); increase accessibility of impact investments to a much broader set of individuals and institutions; and provide greater clarity and standardization among impact investors with myriad motivations, return expectations and approaches to achieving and measuring impact.57

The GIIN’s 2019 Annual Impact Survey provided more details on the steps that participants in the impact investing market believed should be taken with respect to several of the Roadmap categories. For example, a significant percentage of the respondents called on governments to advance the impact investing market through creation of tax or other incentives for impact investors and social enterprises, support for capacity building for investors, direct impact investing and impact-conscious government procurement, and amendments to governance frameworks to explicitly include impact considerations in fiduciary duties and support for educational programs for new market participants. Respondents also reported on significant legal and regulatory barriers and challenges that need to be addressed including regulations on foreign investment and ownership; inconsistent and unpredictable application of policies, particularly relating to foreign direct investment and taxes; complex capital controls; interest rate caps; restrictive application and/or interpretation of fiduciary duties and nonexistent or limited regulation of impact investing and related reporting.58

Governments have been responding to calls for them to increase their support for impact investing through the development of new regulatory frameworks and policies to encourage private impact investing and the formation of impactful business enterprises. Examples of such actions highlighted in GIIN’s 2019 Annual Impact Survey included the French Impact Initiative launched by the French Government in January 2019 to unite and diversify social entrepreneurs and create a national social innovation accelerator to mobilize EUR 1 billion of public and private funding in five years for venture- and growth-stage businesses and provide them with capacity building support to scale; the creation of a Fund for Social Innovation by the Portuguese government to provide equity and debt financing for enterprises recognized as innovation and social entrepreneurship initiatives; the designation of “opportunity zones” by the US federal government to encourage and facilitate investments in economically distressed areas; and the announcement by the Office of Social Impact Investment of the state government of New South Wales in Australia of an initiative to finance innovate strategies to prevent homelessness among people exiting government services such as public housing or juvenile justice. The Development Working Group, a subgroup of the G20, has issued the “G20 Call on Financing for Inclusive Businesses,” a declaration that calls on governments to provide friendly regulatory environments for inclusive businesses in order to promote sustainable development.⁵⁹

Case studies and other illustrations and explanations of the application of the principles and guidelines include in this publication are available from a variety of sources prepared and published by organizations with substantial experience relating to impact investing including Rockefeller Philanthropy Advisors and the GIIN. Among the topics covered in these case studies are articulating mission and values and defining impact, implementation tools and tactics, developing an impact investment policy, building the pipeline and generating deal flow, analyzing deals, evaluating impact, impact investing governance, organizing for impact, and investment advisory committees.60 The Annual Impact Investor Surveys published by the GIIN also provide insights into developments in the impact investment market, such as growing interest in gender lens investing, investing in refugee issues, human resources, diversity and inclusion, and the role of governments and policy.⁶¹

¹ Krauss, A., P. Kruger and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand? 18–19. Zurich: Sustainable Finance Institute; Environmental, Social and Governance Issues in Investing: 2015. A Guide for Investment Professionals. CFA Institute; and Changing Dynamics of Sustainable Finance: The Regulatory Push in the Direction of Sustainable Growth, Sia Partners. February 25, 2020. https://sia-partners.com/en/news-and-publications/from-our-experts/changing-dynamics-sustainable-finance-regulatory-push

² https://group.bnpparibas/en/news/sustainable-finance-about. For further information on social impact investing, see the website of Finansol (https://finansol.org/en/index.php), a French organization that certifies certain social finance products and monitors trends in social finance.

³ Krauss, A., P. Kruger, and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand? 18–19. Zurich: Sustainable Finance Institute.

⁴ Impact Investment: The Invisible Heart of Markets. 2014. Social Impact Investment Taskforce, 18. The Taskforce was convened in 2013 to bring together governmental and sectoral experts from the G7 countries, the European Commission and Australia to discuss and report on recommendations for “catalyzing a global market in impact investment.”

⁵ https://group.bnpparibas/en/news/sustainable-finance-about. BNP noted that with the consent of investors profits generated from impact investment projects may be reinvested to combat exclusion, protect the environment or promote development and solidarity.

⁶ Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners, 8. Rockefeller Philanthropy Advisors, See also Burand, D. 2015. “Resolving Impact Investment Disputes: When Doing Good Goes Bad.” Washington University Journal of Law & Policy 48, pp. 55–57 (Note 6) (“Some observers trace impact investing’s roots in the United States to 1950, when the United States started selling political risk insurance to US companies investing abroad.”)

⁷ See Singh, J. 2020. “Maximizing Outcomes in Impact Investing.” March 26, 2020, https://knowledge.insead.edu/strategy/maximising-outcomes-in-impact-investing-13636

⁸ https://investopedia.com/terms/v/venture-philanthropy.asp

⁹ See Core Characteristics of Impact Investing. 2019. Global Impact Investment Network. https://thegiin.org/assets/Core%20Characteristics_webfile.pdf

¹⁰ Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners, 28–30. Rockefeller Philanthropy Advisors. (includes a table that describes how the International Finance Corporation assessed the degree to which specific asset classes have the impact investing attributes of intent, contribution (explained below) and measurement).

¹¹ Id. (quotation taken from Brest, P., and K. Born. 2013. “Unpacking the Impact in Impact Investing.” Stanford Social Innovation Review: Informing and Inspiring Leaders of Social Change). Godeke and Briaud conceded that the inclusion of “contribution” as one the hard boundaries of what constitutes an impact investment is still being debated.

¹² https://thegiin.org/impact-investing/need-to-know/#how-big-is-the-impact-investing-market. According to GIIN’s 2019 Annual Impact Investment Survey the size of impact AUM grew by a 17% compound annual growth rate from 2015 to 2019.

¹³ Sustainable Finance (The middle Road), https://themiddleroad.org/sustainable-finance-unleashed/

¹⁴ The Economist explains: What is Sustainable Finance? The Economist. April 17, 2018, https://economist.com/the-economist-explains/2018/04/17/what-is-sustainable-finance

¹⁵ Id.

¹⁶ Godeke, S., and P. Briaud. 2015. Impact Investing Handbook: An Implementation Guide for Practitioners, 8. Rockefeller Philanthropy Advisors. See also Burand, D. 2015. “Resolving Impact Investment Disputes: When Doing Good Goes Bad.” Washington University Journal of Law & Policy 48, pp. 55–57 (Note 6) (“Some observers trace impact investing’s roots in the United States to 1950, when the United States started selling political risk insurance to US companies investing abroad.”)

¹⁷ By 2020, over 40 states and the District of Columbia had either adopted legislation authorizing the creation of a benefit corporation or were seriously considering such legislation https://benefitcorp.net/policymakers/state-by-state-status

¹⁸ See 6 of Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014, amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, Official Journal of the European Union L330/1-330/9.

¹⁹ Williams, C. 2016. “Corporate Social Responsibility and Corporate Governance.” In Oxford Handbook of Corporate Law and Governance, eds. J. Gordon and G. Ringe, 16. Oxford: Oxford University Press, Available at http://digitalcommons.osgoode.yorku.ca/scholarly_works/1784 (citing Initiative for Responsible Investment, Corporate Social Responsibility Disclosure Efforts by National Governments and Stock Exchanges (March 12, 2015), available at http://hausercenter.org/iri/wpcontent/uploads/2011/08/CR-3-12-15.pdf). The US has been notably slower than other jurisdictions to regulate with respect to disclosures relating to environmental and social responsibility; however, the SEC has engaged in rulemaking relating explanation of climate risks to their future profitability, either from physical changes associated with climate change, or from regulatory initiatives designed to mitigate climate risk; disclosure of the ratio of the CEO’s total pay to the median employee pay; mine safety disclosure; and “conflict minerals” disclosure where tin; tantalum, tungsten or gold from the Democratic Republic of the Congo or neighboring countries were incorporated into listed companies’ products. Id.

²⁰ Id.

²¹ 2019. Principles for Purposeful Business. London: The British Academy.

²² It has been reported that the SEC has sent examination letters to asset managers and funds that have been marketing themselves as pursuing ESG strategies. See Fleishhacker, E., and R. 2020. Young. Impact Investing: A Legal Primer. Arnold & Porter Kaye Scholer LLP.

²³ Federal regulation relating to consideration of ESG factors by managers of private retirement plans remains controversial. Early in 2020 the Department of Labor (“DOL”) announced a proposed rule that would direct retirement plan fiduciaries who manage funds under the Employment Retirement Income Security Act of 1974 that they must select plans based on financial considerations, meaning that fiduciaries would be restricted from factoring in non-pecuniary goals and that ESG factors could only be considered if the presented economic risks or opportunities and were material under generally accepted investment theories. The proposals were heavily criticized by asset managers and large investors including the Investment Company Institute, BlackRock, the Vanguard Group and State Street Global Advisors, many of which called for the proposal to be withdrawn and for the DOL to engage with industry on the subject. Among other things, comment letters on the proposal took issue with the assumption that integrating ESG is by nature non-pecuniary and suggested that any legitimate concerns could be addressed by a robust disclosure regime rather than restrictions on the discretion of asset managers. L. Weiss, “Asset managers, investors criticize Labor Dept. proposal on ESG”, 2020 CQCRPGRPT 0296 (August 12, 2020).

²⁴ Saldinger, A. May 18, 2020. “Impact investing and COVID-19: A Moment for Growth or a Flight from Risk.” https://devex.com/news/impact-investing-and-covid-19-a-moment-for-growth-or-a-flight-from-risk-97235

²⁵ https://bloomberg.com/news/articles/2020-06-18/socially-responsible-managers-commit-to-investing-against-racism

²⁶ Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners, 46–50. Rockefeller Philanthropy Advisors.

²⁷ Id. at 50.

²⁸ Greene, S. October 2015. A Short Guide to Impact Investing. The Case Foundation, Preface.

²⁹ http://thenewmediagroup.co/the-global-impact-investing-ratings-system/

³⁰ Other organizations that provide assistance to impact investors the Toniic Institute, a membership-based impact investing platform for exchanging knowledge and investment opportunities (https://toniic.com/); NPX, an impact fund manager that connects nonprofit organizations seeking to raise capital for long-term impact initiatives (https://npxadvisors.com/); CREO Syndicate, a platform for investors to share experiences, discuss common interests and explore investment opportunities across the global environmental, sustainability and impact marketplace (http://creosyndicate.org/); Confluence Philanthropy, an international platform focused on advancing mission-aligned investing (https://confluencephilanthropy.org/); and ImpactAssets, a facilitator of direct impact investing within donor advised funds (https://impactassets.org/). See Mac Cormac, S., J. Finfrock and B. Fox. 2019. “Impact Investing.” In The Lawyer’s Corporate Social Responsibility Deskbook , eds. A. Gutterman et al, 245–246. Chicago: American Bar Association.

³¹ The Impact Management Project is also powering SDG Impact (sdgimpact.undp.org), a UNDP flagship initiative focusing on generating and leveraging private sector capital in delivering the SDGs. Launched in September 2018, SDG Impact seeks to provide investors, businesses and others with unified standards, tools, and services required to authenticate their contributions to achieving the SDGs and to identify SDG investment opportunities in emerging economies and developing countries. For further information, see https://sdgimpact.undp.org/SDG-Impact.pdf. SDG impact measurement and reporting is also one of the issues focused on by the Social Sector Network (https://socialsectornetwork.com/).

³² For further discussion, see Gutterman, A. 2020. Sustainability Standards and Instruments. New York, NY: Business Expert Press.

³³ Mac Cormac, S., J. Finfrock, and B. Fox. 2019. “Impact Investing.” In The Lawyer’s Corporate Social Responsibility Deskbook, ed. A. Gutterman et al. 233–234. Chicago: American Bar Association.

³⁴ Impact Investing: A Guide to this Dynamic Market. 2019. Global Impact Investment Network, 4.

³⁵ Annual Impact Investor Survey 2019 (Global Impact Investment Network, 2019), XIXII.

³⁶ Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners, 60. Rockefeller Philanthropy Advisors.

³⁷ Id. at 60–64.

³⁸ Mac Cormac, S., J. Finfrock, and B. Fox, “Impact Investing.” In The Lawyer’s Corporate Social Responsibility Deskbook, eds. A. Gutterman et al., 233–234. Chicago: American Bar Association.

³⁹ Among the “impact risks” that impact investors should consider are evidence risk (i.e., the lack of high-quality data regarding impact), drop-off risk (i.e., the possibility that positive impacts will not endure) and unexpected impact risk, which refers to the possibility that unexpected positive or negative impacts may occur as a result of the project funded by the investor. Id. at 66.

⁴⁰ Impact Investing: An Introduction (Rockefeller Philanthropy Advisors), 4. It is assumed that investments along the spectrum are made in “impact investees”, which are described as mission-driven organizations with a market-based strategy and can include for-profits, nonprofits or hybrids.

⁴¹ For further discussion, see Philanthropy and the SDGs: Getting Started (Rockefeller Philanthropy Advisors) and Philanthropy and the SDGs: Practical Tools for Alignment (Rockefeller Philanthropy Advisors).

⁴² Godeke, S. and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners, 67–68. Rockefeller Philanthropy Advisors. GIIN has described gender lens investments as investments made into companies, organizations, and funds with the explicit intent to create a positive, measurable effect on gender, and reported that about 70% of the respondents to its 2018 Annual Impact Investor Survey applied a gender lens to their investment processes and that most of them made investments into companies that had good internal gender equality policies or that targeted women and girls as beneficiaries. Annual Impact Investor Survey 2019 (Global Impact Investment Network, 2019), 28.

⁴³ Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners. Rockefeller Philanthropy Advisors; 67.

⁴⁴ Id. at 76 (including Exhibit 3–11, a Logic Model Overview adapted from Logic Model of Measuring Impact, Impact Management Working Group of the G8 Social Impact Investment Taskforce, 2014).

⁴⁵ Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners, 25. Rockefeller Philanthropy Advisors.

⁴⁶ Id. at 37–38.

⁴⁷ Annual Impact Investor Survey 2019. 2019. Global Impact Investment Network, 11 and 25.

⁴⁸ Id. at XIXII.

⁴⁹ Impact Investing: A Guide to this Dynamic Market, 5. Global Impact Investment Network.

⁵⁰ Annual Impact Investor Survey 2019. 2019. Global Impact Investment Network, XIV.

⁵¹ Krauss, A., P. Kruger and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand? 16. Zurich: Sustainable Finance Institute.

⁵² Krauss, A., P. Kruger and J. Meyer. September 2016. Sustainable Finance in Switzerland: Where Do We Stand? 20. Zurich: Sustainable Finance Institute.

⁵³ Ignited, A Brief Overview of Sustainable Finance, https://ignited.global/publications/crimson-financier/brief-overview-sustainable-finance

⁵⁴ Id. at 6.

⁵⁵ Greene, S. October 2015. A Short Guide to Impact Investing. The Case Foundation, Preface.

⁵⁶ https://thegiin.org/research/publication/giin-roadmap (as modified from additional descriptions appearing in Highlights from Roadmap for the Future of Impact Investing: Reshaping Financial Markets (Global Impact Investment Network, 2020)).

⁵⁷ Id.

⁵⁸ Annual Impact Investor Survey 2019. 2019. Global Impact Investment Network, 40.

⁵⁹ Id. at 41.

⁶⁰ See, e.g., Godeke, S., and D. Bauer. 2008. Mission-Related Investing: A Policy and Implementation Guide for Foundation Trustees. Rockefeller Philanthropy Advisors and Godeke, S., and R. Pomares. August 2010. Solutions for Impact Investors: From Strategy to Implementation. Rockefeller Philanthropy Advisors; Godeke, S., and P. Briaud. 2020. Impact Investing Handbook: An Implementation Guide for Practitioners. Rockefeller Philanthropy Advisors and the Annual Impact Investor Survey 2019. 2019. Global Impact Investment Network.

⁶¹ Annual Impact Investor Survey 2019. 2019. Global Impact Investment Network, 40.