Social investment refers to an investment approach that intentionally pursues social impact in addition to financial returns. It emerged in the late 20th century as a new way of using private capital to address social and environmental issues. Key defining aspects of social investment include intentionality to achieve positive impact, measurement of impact, return expectations ranging from below market rate to market rate, and investing across asset classes into companies, organizations and funds. The social investment market has seen rapid growth in the past decade, with over $500 billion in impact investment assets currently under management globally. However, it still accounts for a small portion of total managed assets, and remains less understood by mainstream investors in many emerging markets like China. This article provides an introductory overview of the concepts, development history, market size, implementation approaches and key players in the social investment industry.
social investment sits in the spectrum between pure philanthropy and pure commercial investment
Social investment is considered a ‘big tent’ encompassing various investment approaches that intentionally pursue social or environmental impact alongside financial returns. It represents a spectrum spanning from philanthropic grant-making at one end to pure commercial investing at the other end. The Skoll Centre for Social Entrepreneurship at Oxford University describes social investment as an approach positioned between pure philanthropy and pure commercial investment that seeks both social impact and financial returns. Similarly, the Global Impact Investing Network (GIIN), a leading industry organization, defines impact investments as ‘investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return’. So a key distinguishing factor of social investment is the intentionality to achieve positive impact on top of financial returns, unlike ESG investments which mainly seek to avoid or reduce negative externalities.
the concept originated in the 1990s and has seen exponential growth since the 2008 financial crisis
The term ‘impact investing’ was first coined at a 2007 meeting convened by the Rockefeller Foundation at the Bellagio Center in northern Italy. Many of the participants at that meeting went on to become pioneers in the nascent field of impact investing. Dissatisfied with merely screening out bad companies through socially responsible investing or ESG incorporation, these new impact investors aimed to proactively channel more capital towards enterprises solving pressing social and environmental problems, particularly social enterprises. Interestingly, this concept began gaining traction amidst the 2008 global financial crisis, which revealed the pivotal role of financial systems in human societies and prompted many to explore how capital markets’ tremendous power could be harnessed for positive social ends. According to a 2010 report by JPMorgan Chase and the Rockefeller Foundation, the impact investing market was projected to reach over $400 billion globally by 2020. The field has certainly caught on since then, with the latest estimate by GIIN pegging total global assets committed to impact investing strategies at over $500 billion as of early 2019.
diverse implementation approaches cater to different investor priorities on impact versus returns
There is significant diversity in how social investment is implemented based on investors’ relative priorities between social impact and financial returns: – Equity investment: direct investments into enterprises solving social or environmental problems, suited for investors willing to take higher risks in exchange for social impact potential. – Debt instruments: typically fixed income products like bonds and loans that support impact-driven organizations and projects, suitable for more conservative investors. – Shareholder engagement: leveraging shareholder status in public companies to influence corporate behavior changes on ESG issues, providing a way to seek impact without direct exposure or control. Different social investment asset classes serve the spectrum of investors ranging from pure philanthropic foundations to commercial asset managers. A unifying thread is the intention and commitment to positively contribute to pressing societal challenges in some form alongside financial returns.
market size has grown exponentially and is expected to reach new highs in the coming decade
According to the latest market sizing research conducted by the Global Sustainable Investment Alliance (GSIA), socially responsible investment strategies across the world’s five largest markets have increased by over 70% from 2014 to 2018, rising from $6.1 trillion to $10.4 trillion. The total global assets under management specifically employing impact investing strategies stand at over $500 billion as of 2019 based on GIIN’s periodic surveys. And this amount is projected to grow substantially to new highs in the next decade as more investors embrace their ability to address societal needs through capital allocation. Although currently concentrated in developed North American and Western European markets, impact investment is also gaining momentum in emerging markets like China. Industry data shows China’s domestic impact investment market reached $136 million in 2019, but remains miniscule compared to commercial investing.
Social investment refers to investment approaches intentionally seeking social impact alongside financial returns, spanning from philanthropic to commercial strategies across asset classes. Its market has achieved exponential growth since the 2000s.