2.1 Clarifying the Taxonomy

Impact investing is an investment approach that intentionally seeks to create both financial return and positive social or environmental impact that is actively measured.¹¹

First, it is an investment approach and not an asset class. It is a criterion by which investments are made across asset classes. An asset class is traditionally defined as securities or investments that behave similarly under varying market conditions and that are governed by a similar set of rules and regulations. Under this definition, it is clear that impact investing is an investment approach across asset classes, or a lens through which investment decisions are made, and not a stand-alone asset class. Certain impact investments (e.g. public equity security of an impact enterprise) may behave similarly to certain asset classes (e.g. public equities), while other impact investments (e.g. social impact bond) may not behave similarly to other asset classes (e.g. corporate bond). See Section 3.4 for more on this point in particular.

Most organizations can look at their portfolio and find areas that are creating social impact; without the distinction of ‘intention’, the discussion becomes watered down and nothing new.

 

Renat Heuberger, Chief Executive Officer and
Deputy Chairman, South Pole Carbon, Switzerland

Second, intentionality matters. Investments that are motivated by the intention to create a social or environmental good are impact investments. However, if the intention is solely financial gain, even if the investment unintentionally creates social or environmental value, the designation of the investment being an impact investment is less certain. For example, an investment made into a pharmaceutical company that manufactures life-saving medications solely for the purpose of generating financial returns without the intention for social impact is not an impact investment. That said, the investment may certainly be impactful, but not an “impact investment” by definition.

Third, the outcomes of impact investing, including both the financial return and the social and environmental impact, are actively measured. The degree of financial return may vary widely from recovery of principal to above-market rates of return. For further discussion on this point, see Section 3.5. In addition to financial return, the investment’s social or environmental value must be measured in order for the investment to be considered an impact investment. For examples of measurable social or environmental impact across eight key investment sectors in impact investing, see Table 1.¹²

Table 1