There is an incredible movement going on in the impact investing space and more and more investors are interested to learn what sets impact investing apart from traditional investing and what unique challenges an impact investor might face. On 18 March 2014, IIX and Shujog teamed up in the latest Impact Academy “How to be an Effective Impact Investor” to share their experience.
When asking what makes an investor effective in the traditional sense, the answer will undoubtedly emphasize financial gains. However, when trying to evaluate the effectiveness of impact investments, the answer takes on a new dimension and becomes much more personal. Every impact investor will have his or her own unique impact goals, driven by personal values and motivations – one investor may aim to alleviate a specific problem, while another may focus on helping a particular region or country.
In addition to individual impact goals each impact investor will have a certain financial return requirement and risk tolerance level, as illustrated in the graphic below.
The effectiveness of an individual impact investor will therefore depend on how closely the investor is able to align an investment’s impact, return and risk levels with his or her individual expectations and goals.
The personal dimension motivating impact investments was clearly demonstrated during the impact investment simulation, in which Impact Academy participants were asked to allocate $100,000 across three different impact investment opportunities. While the opportunity that appeared to deliver the highest direct social impact emerged as the favorite, all three opportunities attracted significant interest.
Measuring the effectiveness of impact investing as an asset class in general; however, will require a more objective approach. While impact investing is still in a nascent stage of development and should probably be given a certain grace period before its performance is compared to traditional asset classes, we expect that it will ultimately be able to compete with any other investment with a comparable level of risk. Building awareness and knowledge about this will enable the impact investment sector to attract more capital from traditional investors. These investors will drive the exponential growth this sector needs to facilitate large-scale social and environmental impact – the outcome we are all striving towards.