Chapter One
What Is Impact Investing?

LATELY, IT SEEMS LIKE every financial institution, from Vanguard to KKR, wants to sell you something with impact in the name. But with no clear definition of impact investing, how do you know if there is anything different about these investment funds? This also begs the question—what impact is each of these funds striving for? And do you agree with the goal?

There are also many mistruths and misconceptions about impact investing that lead to unsubstantiated skepticism. One myth is that impact investing is a socialist conspiracy theory to redistribute wealth. Some critics conversely suggest impact investing is the capitalist way of extracting more profit from those in need. I’ve had people tell me it’s only for liberals, and others say it’s only for religious conservatives. It won’t make money. It won’t do good.

As impact investing found its way to mainstream media, I found it difficult to understand the logic behind such sensational and contradictory depictions. It’s misunderstood, as the field has a long, winding history and a large tent that includes many approaches. I stumbled upon the idea 20 years ago and have had my own journey trying to figure out how to turn impact investing into a career. I can assure you, it does not have to be complicated, and you can apply it to your own portfolio if you break down the core principles.

Before I provide an accurate definition of impact investing, let me first set the record straight on some of the myths.

• Myth: Impact investing won’t make money, as you have to sacrifice returns to do something good.

  Truth: It is possible to generate a range of financial returns while driving a positive impact. Many impact investments target returns that are in line with nonimpact investments. Other impact investments purposely target lower returns to create a type or amount of impact that otherwise wouldn’t be possible but are often necessary to prove a market or catalyze future investment by those seeking market-rate returns. The common thread is an objective to create some amount of financial returns and social impact, with the investor needing to be clear about what amount of each in order to be held accountable for that.

• Myth: Impact investing is just a marketing scheme.

  Truth: Unfortunately, there are investment funds that use the label impact investing opportunistically with little to no intentional strategy or process to create any impact. However, those are simply bad investments. They don’t define what one should expect. This same misbehavior can be found in other investment strategies and industries. I’m confident that with time those misusing the label will face consequences, from lawsuits to obsolescence.

• Myth: Impact investing is a driver of woke capitalism.

  Truth: The myth to bust here is the very idea of “woke capitalism,” which is the belief that corporations seeking to communicate and operate in a way that is aligned with social goals—such as gender diversity, climate mitigation, or voting rights—is an overextension of their role in politics. Corporations have always tried to influence public policy. Just take a look at the billions of dollars spent yearly on lobbyists.1 The rise of impact investing has also led to more CEOs feeling empowered and incentivized to speak up and change their management practices around impactful issues, making their involvement and position on topics more transparent to their employees, customers, and the public.

• Myth: Impact investors are trying to displace philanthropy and nonprofits.

  Truth: Nonprofits take on many challenges affecting vulnerable communities that only they can address, and philanthropy is an essential resource for this work. Impact investors believe that for-profit companies can help address or lessen many of the large challenges facing society and be partners to both philanthropy and government. Impact investing is not the solution, but it is an important part of the solution. For example, no amount of impact investing dollars will solve climate change; the challenges facing the planet require grant funding and other forms of philanthropic capital. Impact investors seek to provide an additional type of capital and alternative solutions to help mitigate and adapt to climate change.

• Myth: You can’t “prove” the impact of impact investing as it’s not measurable.

  Truth: Reputable impact investors can and do measure impact in accurate and verifiable ways. However, there are practical considerations, from cost to time horizon and privacy, that affect the level and type of measurement methodology. This variety in approach creates a lack of standardization, leading to the myth that measurement isn’t possible. Foundations that provide philanthropic capital to nonprofits face the same measurement constraints despite decades of standardization attempts. Leaders in both impact investing and philanthropy support improvement in this area.

• Myth: Impact investing is a fad, and real investors and business leaders don’t care.

  Truth: The consistent growth in impact assets under management throughout boom and bust markets shows no sign of waning (Figure 1.1). This trend is apparent in nearly every asset class and geography. The number of investment firms and business executives showing an interest in developing expertise or offering in this space supports that the industry is here to stay.

• Myth: Impact investing is only for liberals, for the religious, for the rich, for the young, etc.

  Truth: Impact investing is not a monolithic appli-cation but is based on a set of core principles to allow for a diversity of objectives and approaches.

  I don’t know how this myth got started, as in-dividuals and organizations of various social, religious, and economic statuses participate equally. For example, the Catholic Church and the Ford Foundation are known to invest their dollars in alignment with their unique missions. At Impact Engine, we have investors ranging from those in their 80s to those in their 20s, and often, generations come together within families to invest with impact.

• Myth: Impact investing is a small market with limited options.

  Truth: With more than $1 trillion of assets under management and growing, there is an increasing depth and breadth of impact investment options. As more dollars and talent roll into the field, this will only improve further. Many families and foundations, like the Nathan Cummings Foundation’s $500 million endowment or the California Endowment’s $4 billion, have already committed to investing all their capital with an impact lens.

Figure 1.1 Sizing the market

Source: GIIN Annual Impact Investor Survey. The GIIN. (2015–2022). https://thegiin.org.

With some of the myth-busting now behind us, let’s explore what defines an impact investment. While impact investing has a history rooted in the environmental, social, and governance (ESG) industry, which we will cover in Chapter 3, impact investing as a defined investment approach began in 2007 thanks to the leadership of the Rockefeller Foundation.

That year, the Rockefeller Foundation hired Anthony Bugg-Levine to lead a new effort in-house and brought together roughly 40 practitioners to their retreat center in Bellagio, Italy, to collaborate on bringing a clear definition to the marketplace.2 They knew it was possible to drive impact outcomes with their investments, but there were such wide-ranging strategies and results that a unified view of impact investing was needed to understand its growing role in the portfolio.

For example, the Acumen Fund was started by Jacqueline Novogratz, who invested philanthropic dollars in revenue-generating social enterprises in East Africa and South Asia to recover most but not all of the capital invested.3 Muhammad Yunus established the Grameen Bank to lend directly to women in Bangladesh, taking on risks that other lenders would typically avoid while also innovating a support model that allowed for positive financial returns.4 In U.S. markets, DBL Partners (at the time called Bay Area Equity Fund) managed a $75 million early-stage venture capital fund that invested in high-growth startups, including Tesla.5 Despite the wide range of security types, risk and return targets, and impacts each investment firm was striving for, something in common connected them all and separated these strategies from other socially responsible investments and ESG funds. They were all attempting to have a social and environmental impact with their capital while also delivering some level of financial returns.

The Rockefeller Foundation was not the only organization that had begun to explore how these kinds of investments would further their charitable grants. W.K. Kellogg Foundation, JPMorgan Chase Foundation, MacArthur Foundation, and the Annie E. Casey Foundation were among the other early leaders. Additionally, a number of prominent family offices, including Mitch Kapor, Justin Rockefeller, Liesel Pritzker Simmons, Jeff Skoll, and Charlie Kleisner, were beginning to invest their personal wealth in this manner. Initially, these were mostly mission-oriented...