Impact investment for Social Enterprise

Contributing to the social and environmental well-being of society has historically taken the form of philanthropic contributions. These contributions that only seek to generate a positive change in society and the environment, have been developed in a dissociated way from traditional investments focused on financial return. The recent phenomenon of impact investing has come to challenge this dissociation by proposing the confluence of both worlds, in models where the search for positive impact coexists with financial sustainability. This form of hybrid investment, which emerged just over a decade ago, has made it possible to channel new capital and attract new actors committed to a comprehensive and sustainable social development in the future.

Impact investing is an emerging phenomenon that has positioned itself within the social innovation agenda of developed and developing countries. It emerged, as a concept, in 2007 when the Rockefeller Foundation coined the term impact investing, giving a change in the definition of some aspects of socially responsible investment. We can define Impact investments as those that: “… are intentionally aimed at solving social or environmental problems by optimizing risk and financial performance, as well as impact, through the measurement of results of specific social, environmental and financial objectives” (EVPA, 2021).

One of the first global efforts to be made was the Social Impact Investment Taskforce (SIIT), an international collaborative group created in 2013 under the UK chairmanship of the G8. In 2014, this group, after consulting experts from the government, private and social sectors of the G8 countries, Australia and the European Commission, generated eight high-level recommendations, which were reflected in the report “Impact Investment: The Invisible Heart of Markets”, which involves all key impact investing players.

Nowadays, social entrepreneurship’s ecosystem lives a special dynamism and shows a great capacity for innovation, even generating “export models” of intervention for increasingly urgent complex challenges. In this framework, contributing knowledge to the phenomenon of social investments is especially relevant. Knowledge of a sector is a necessary element for its development; it allows identifying growth barriers, comparing local and international realities, defining points of origin and projecting its trajectory into the future.

According to the Global Impact Investing Network (GIIN), impact investments “are those investments in companies, organizations and funds with the intention of achieving a social or environmental benefit for the community, and at the same time a financial return for the investor” (Global Impact Investing Network (GIIN) & J.P. Morgan, 2015) This definition goes one step further than responsible and sustainable investments since it requires the investor to have a double objective of results (World Economic Forum & Deloitte Touche Tohmatsu, 2013). 

Rethinking a new paradigm 

The paradigm shift for investment seeks to generate a change in the mentality of investors so that they not only consider the return and economic risk in their decision-making, but also the impact they can generate on society. To consolidate this change, it is necessary to work on the first two recommendations made by the European Commission. The first of these is to establish social and environmental objectives in investments, which can be validated by measuring the impact generated. Secondly, we must encourage investors to consider return, risk and impact in their decision-making.

Regarding the establishment of social and environmental objectives, and the use of impact metrics, impact investments, in addition to considering financial return measurements, must also include impact measurement criteria. The study shows that the Irish private sector, which is already making impact investments, uses mainly five measurement systems: Impact Reporting and Investment Standards (IRIS), The Global Impact Investing Rating System (GIIRS), Progress out of Poverty Index (PPI), Global Reporting Initiative (GRI), and Sustainable Return on Investments (SROI). Also, many of these actors have developed their own performance metrics in accordance with the goals of their company or organization.

Other types of investors and actors also show interest in adopting social and environmental objectives. However, this has not been enough to use an impact evaluation system, which leaves this type of investment in a vulnerable situation, where the lack of evidence can lead to doubts about the value and impact it generates. “Social Impact Investment works by identifying public sector benefits that can be achieved by tackling social problems early and raising private capital to fund these interventions upfront” (Irish Government Economic & Evaluation Service (IGEES), 2015).

At the level of encouraging investors to consider return, risk and impact on their investments, efforts have focused on building the market and generating evidence that supports the hypotheses posed by impact investment, mainly through the creation of organizations. 

The need to generate a new paradigm means that in the management, promotion and implementation of impact investment schemes, actors from different sectors and characteristics participate, forming a diverse ecosystem that in order to function properly requires the participation and articulation of all. Enabling this ecosystem requires work on the last three recommendations of the European Commission: Develop capacities within the ecosystem, mainly those that generate the supply for investment; create appropriate legal forms for impact investing; and include impact investing within the development agenda of the region and the country where it is operating (European Commission, 2021).

In conclusion, impact investing is a growing phenomenon in Ireland.However, it has yet to consolidate and position itself as an option for traditional investors and for those who have started to opt for socially responsible investments. To achieve this, it is necessary to recognize the current state of impact investing in Ireland and the good practices that exist internationally, in order to generate actions in the short and medium-term.

To discuss this and other topics, we invite you to be part of our next online event where we will be developing the new challenges of the “Impact Investors”. Click here for more information and to reserve your place.

Pablo Müller

Bibliography 

European Commission, 2021. European Commission. [Online]
Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2023
[Accessed 14 03 2021].

EVPA, 2021. European Venture Philanthropy Association. [Online]
Available at: https://evpa.eu.com/knowledge-centre/publications/investing-for-impact-evpa-impact-strategy-paper
[Accessed 14 03 2021].

Global Impact Investing Network (GIIN) & J.P. Morgan, 2015. Eyes on the Horizon: The Impact Investor Survey, s.l.: Rockefeller Philanthropy Advisors.

Irish Government Economic & Evaluatation Service (IGEES), 2015. Social Impact Investments in Ireland, Dublin: s.n.

World Economic Forum & Deloitte Touche Tohmatsu, 2013. From the Margins to the Mainstream. Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors, Geneva, Switzerland: s.n.

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