Traditionally, environmental or social issues were addressed only through charitable philanthropic donations and actions. Impact investing provides an alternative perspective, as market investment does not need to focus solely on achieving financial returns. Investors have the opportunity to use investment vehicles which have a dual purpose; the production of financial returns as well as a positive impact on solutions to environmental and social issues.
Valued at US$46 billion in 2014, the impact funds market is a small but growing sector. Recent annual growth of 20% led J.P. Morgan to conclude that the market is moving from a proof of concept phase to a growth phase (JP Morgan Spotlight on the Market, Impact Investor Survey May 2014). Jersey’s strong funds and philanthropy pedigree have seen the Island develop into a hub for this developing market, with a number of impact funds being established in recent years.
Investors consciously participate in funds which generate both financial and social and/or environmental returns. Non-financial returns may include, for example, increasing the use of green energy, improving access to healthcare or the provision of social housing.
Investors and funds remain within the ‘forprofit’ classification. The degree of financial return varies widely, with some funds seeking market rates of return and others accepting a lower return in exchange for the achievement of a social outcome. There is usually a minimum expectation of the return of capital.
The desired social or environmental impact is quantifiable and measurement helps to ensure transparency. Whilst many impact funds continue to remunerate managers solely on financial performance, some are aligned to a combination of both financial and social impact measurements.