What is an Impact Strategy in Investment?
09 August, 2024
Material created with the support of EVPA
An impact strategy is an approach to investing and project management that aims to achieve both financial returns and significant social impact. This method involves balancing financial benefits with positive changes in society or the environment.
To better understand the difference between two impact investing strategies, the European Venture Philanthropy Association (EVPA) created a classification for investors based on their impact strategies, which separate social impact and financial returns. Investors can be distinguished by the following characteristics:
- Organizations focusing solely on achieving social goals without financial returns.
- Organizations prioritizing social returns but also allowing for the possibility of financial profitability.
- Organizations considering both social and financial benefits equally.
- Organizations prioritizing financial returns while also aiming for social efficacy.
In addition to this, EVPA specialists identified key elements of analysis and evaluation applicable to investors supporting social purpose organizations (SPOs):
Desired Social Impact: Indicates the specific social change effect or outcome to be achieved through investment or support of SPOs. This is assessed based on potential social goals that a given initiative can achieve, such as improving living conditions, enhancing education or healthcare quality, or supporting vulnerable populations.
Expected Financial Return: Defines the anticipated financial return or recovery of invested funds that investors expect from their investments in SPOs. This may include project profitability, investments in social enterprises, or other forms of investment.
Risk Appetite (Financial and Social): Reflects the investor's willingness to take on risks associated with both financial and social aspects of investments. Some investors may be willing to take high risks and invest in projects with significant social impact potential but high financial risks, while others may choose less risky projects with a more conservative approach.
Two main impact strategies:
- Impact-Driven
- Investing with Impact
Impact-Driven Investing: This approach involves impact investors—organizations that take on risks that others may not be able or willing to take, focusing on social purpose organizations (SPOs) or social innovations and their ultimate beneficiaries. These investors often adopt a venture philanthropy approach in their investment activities, an innovative method of financing and supporting social projects and organizations using venture capital principles. This includes investing in startups and innovative enterprises with high growth potential, active management and support, and striving for significant financial success through initial public offerings (IPOs) or company sales. Impact-driven investing aims to maximize social impact by actively participating in the development and scaling of socially oriented initiatives and includes three main practices:
- Measurement and management of impact
- Non-financial support
- Tailored financing
These investors allocate funds to maximize the social impact of an initiative, understanding that financial profit may be secondary or even absent.
Investing with Impact: This strategy aims to achieve both social impact and profit. Using this strategy, investors seek to balance social and financial goals, recognizing that both components are important for the long-term success of an initiative. Thus, this impact strategy encompasses a wide range of approaches, from a complete focus on social impact to a balanced approach considering both social and financial outcomes.
Impact-driven investors and investors with impact are two sides of the same ecosystem. They represent two typologies and provide conceptual approaches for investors and investees to follow.