What is impact investing—and how does it differ from traditional investing?
Impact investing is an investment approach that explicitly seeks to generate positive social or environmental outcomes alongside financial returns. Unlike conventional investing, which primarily targets risk-adjusted monetary gains, impact investing asks: What real-world differences does this investment make?
In practice, impact investors deploy capital to projects and organizations that address societal challenges—such as affordable housing, clean energy, education, or healthcare—while aiming to preserve or grow the investor’s wealth. The difference lies in intent, measurement, and accountability. The goal is to align dollars with values, and to transparently report on the outcomes as well as the returns.
How do impact investors define “impact”?
Impact is typically defined through measurable outcomes that can be tracked over time. These outcomes are often linked to commonly accepted frameworks such as the United Nations Sustainable Development Goals (SDGs) or country-specific social indicators. By clearly stating the intended impact at the outset, investors create a benchmark against which performance can be judged later.
Common impact themes include reducing greenhouse gas emissions, expanding access to affordable housing, improving health outcomes, and strengthening educational opportunities. Importantly, impact is not a vague aspiration; it is a set of observable, verifiable results that can be attributed to the investment.
How impact is measured: the “how” that proves the story
Measurement is the linchpin of impact investing. There are several frameworks and tools designed to quantify social and environmental results, including:
- IRIS+/Impact Reporting and Investment Standards—a catalog of standardized metrics to describe outcomes.
- GIIRS Ratings—a comprehensive, comparable assessment of a fund’s impact performance.
- SDG-aligned metrics—linking outcomes to specific goals like clean energy access or gender equality.
- Theory of Change—maps how an investment’s activities lead to desired outcomes, establishing a clear causal chain.
Investors typically set Key Performance Indicators (KPIs) before deployment: number of people served, reductions in emissions, or units of energy generated from renewable sources, for example. Data is gathered through audits, third-party verifications, and transparent reporting. The emphasis on independent verification helps prevent outcome washing and strengthens trust with stakeholders.
Financial return vs. social return: balancing the equation
Impact investors often pursue a spectrum of financial objectives—from market-rate returns to concessionary or blended finance where below-market returns subsidize greater social impact. The key is to align risk, return, and impact goals from the start. A well-designed impact strategy specifies how much financial upside is acceptable given the expected social outcomes and how those outcomes will be measured over time.
Accountability: reporting and transparency
Accountability is essential. Investors expect regular, verifiable reporting on outcomes alongside financial performance. This reporting should be accessible, comparable, and credible. Leading practices include third-party assurance of impact data, clear disclosures about methodology, and updates on progress toward stated goals. When impact is reliably measured and disclosed, it becomes a verifiable part of the investment’s value proposition—not a marketing claim.
Choosing an impact approach: what investors should consider
For those new to impact investing, consider these steps:
- Clarify your mission and what outcomes you want to support (e.g., clean air, education access, affordable housing).
- Choose a measurement framework (IRIS+, SDGs, or a custom set of KPIs) that fits your goals.
- Assess verification practices: who audits the data and how often?
- Evaluate the trade-off between financial return and impact intensity—what level of financial risk is acceptable to achieve the desired outcomes?
- Monitor and adapt: impact is dynamic. Regular reviews help ensure the investment remains aligned with goals.
Bottom line: impact investing as evidence-based stewardship
Impact investing reframes the purpose of capital: it is a tool to generate measurable social and environmental benefits while pursuing financial returns. By clearly defining intended outcomes, using standardized metrics, and committing to transparent reporting, investors can know—and demonstrate—whether they are truly having an impact.
