What is impact investing?

Home > Investments > Impact investing

More and more investors are looking for ways to grow their money while making a difference. Impact investing gives investors the opportunity to earn financial returns while supporting positive social and environmental change. In this guide, we’ll define impact investing, exploring different ways to make impact investments and benefits for both investors and society as a whole.

Impact investing can be defined as an investment made for the good of society or the environment, while also aiming for financial returns for the investor. Investors put their money into companies, organisations, or funds that create positive change by, for instance, supporting clean energy, improving access to education, or funding affordable housing. 

The main goal with impact investments is not simply to avoid companies that engage in harmful practices. The funds are actively used for activities that benefit certain sections of society and further-reaching climate and environmental goals.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

Having looked at a definition of impact investing, how does it work? Investors can direct their money into companies or industries that are already making a positive difference. Those companies might offer products designed to reduce environmental impact, such as renewable energy or electric vehicles. Or perhaps they have a core mission that specifically integrates social or environmental change.

When deciding how to invest with impact, investors might consider a company’s values and how it contributes to society. A key piece of information is their commitment to corporate social responsibility (CSR), which is any effort to engage in ethical business practices, such as supporting local communities and ensuring fair wages and working conditions.

Importantly, the social or environmental benefits of impact investing should be measurable, so investors can track how their money is helping to bring about real change. Some impact investments promise the prospect of strong financial gains, while others focus more on social good, even if the expected returns are on the lower side.

Both ESG (environmental, social, and governance) and impact investing come under the overall umbrella of responsible investing and contribute to the broader goal of sustainable finance.

Impact investing is all about making a positive difference. Impact investors can choose the sectors or issues they want to support and focus on using their funds to bring about positive change. Private companies are often their target.

ESG investing is a more focused form of sustainable finance that primarily checks how companies are performing in the three areas: environmental, social, and governance. While ESG investors still focus on ethical considerations, they’re mainly concerned with keeping risk to a minimum and choosing companies that engage in responsible practices.

Similarly to ESG, socially responsible investing (SRI) is a way to invest with the goal of making a lasting positive change. The main difference is in the investor’s approach. 

SRI is a more passive approach that focuses on avoiding harm. Investors may steer clear of companies that cause harm to society or the environment, such as those in tobacco, alcohol, or the military sectors. It’s a chance for investors to bring their finances in line with their ethical values, while still with the goal of growing their money.

Impact investing, on the other hand, takes a more active approach. While they will still be looking to make a profit, investors specifically seek out companies whose core mission is to produce a form of social or environmental benefit.

Another key difference is that impact investors are often more flexible when it comes to the financial gains they might make. They may be willing to accept lower returns if it means making more of an impact.

Impact investing plays an important role in helping to tackle some of the world’s most pressing issues, with climate change at the forefront. Traditionally, investing has been viewed as a way for individuals to build wealth for themselves. However, impact investments show how money can be used for the greater good; to support industries and initiatives that bring about lasting positive change.

It’s often assumed that social and environmental problems should be left to governments or charities to solve. But impact investing proves that investors don’t have to sacrifice potential profits just to make a difference. It’s possible to make a profit and create positive social or environmental outcomes.

Anyone, whether an individual, business, or institution, can get started with impact investing. But what makes something impactful, exactly?

Here are a few areas that investors might explore:

• One example of impact investing is supporting renewable energy companies that focus on green energy sources, such as solar and wind power, helping to reduce pollution and dependence on fossil fuels.
• Education technology investments aim to improve access to quality education, particularly in disadvantaged areas.
• In healthcare, impact investments can help provide better access to health services, particularly in regions with limited healthcare infrastructure.

Some forms of social impact investing focus on making capital more accessible to those who might otherwise struggle to obtain funding, whether due to low income or living in a developing country. This is known as microfinance. It could mean:

• Investing in the construction of affordable homes. Impact investors can help to ensure stable living conditions for families who might otherwise struggle to find housing.
• Supporting credit unions that offer small, lower-interest loans and savings options for those who may lack access to traditional banking.
• Investing in local entrepreneurs, including those from low-income backgrounds.

By directing funds toward businesses and communities often overlooked by traditional finance, this form of social impact investing can help make the financial markets work for more groups of people.

Impact investing is mainly driven by large institutions and qualified individuals, including:

• Hedge funds
• Private foundations
• Pension funds
• Banks
• Fund managers
• Financial advisers
• Non-governmental organisations (NGOs)

These organisations typically have the resources to make substantial impact investments. Employers can also experience the benefits of impact investing when it comes to funds in pension schemes, as it can positively affect both their employees and society as a whole.

Global impact investing spreads investments across various countries and industries, and it can be a way of reducing risk and boosting returns. This can be advantageous for investors based in countries with smaller investment markets, such as Ireland.

Global impact investment funds can offer a broader mix of assets across different sectors and regions. Investors could then diversify their financial portfolios, because the spread of investments ensures that the fund is not overly reliant on any one market or industry. At the same time, the investors can support beneficial projects.

Yes, it’s not just for large institutions. If you have a specific environmental or social cause that you want to get behind, impact investing gives you a way of putting your money to work for it. And it can be easy to get started thanks to socially responsible financial services and online platforms that let you invest directly in projects and companies making a positive impact.

For most people, the easiest way to get involved is through impact investment funds. In Ireland, many investment and insurance companies offer these funds, and you can invest in them through your pension or a regular investment plan.

Impact investments can take various forms, such as stocks, bonds, or mutual funds. If an individual is comfortable making their own investment decisions, they can also simply invest directly in companies or nonprofits that match their values.

Investing with good intentions doesn’t always guarantee the expected results. While many investors believe they’ll make a difference simply by investing in something like solar energy or microfinance, this can be risky. They might ultimately focus more on potential profits rather than whether their investments are really creating a positive impact. And, even though the results of an impact investment should be possible to measure, it’s not always clear how investors can do this.

So there’s not only the risk that an impact investment doesn’t produce the expected positive outcome, there’s also a chance that the investment actually ends up harming society or the environment. This is known as negative impact risk.

On top of this, financial returns may be lower than expected. While impact investing aims to combine financial gains with other benefits, there’s no guarantee the investor will make a return. And, as with any investment, past performance is never a promise of future results.

If you’re looking for a more predictable way to grow your money while still benefiting from competitive interest rates, you might want to consider other options, such as savings accounts available on the Raisin Bank marketplace. With our demand deposit accounts, you can enjoy the freedom to deposit and withdraw funds when it suits you. Plus, eligible savings are protected up to the applicable limits if the bank were to fail, giving you peace of mind that your money is safe.