What is impact investing?
Impact investing is an approach to investing that seeks to generate positive social or environmental outcomes alongside financial returns. Unlike traditional investing, which focuses primarily on risk-adjusted financial performance, impact investing aims to align capital with purposeful goals—such as improving access to education, reducing carbon emissions, or advancing affordable housing—without sacrificing financial viability.
How it differs from regular investing
Regular investing prioritizes risk and return, often with little emphasis on measurable societal effects. Impact investing, by contrast, embeds social and environmental objectives into the core investment thesis. This means selecting opportunities where the business model is designed to achieve impact, then investing with the expectation that both the mission and the market return will deliver value. In practice, impact investing can span public equities, private debt, venture capital, and blended finance structures, all tuned to specific impact goals.
How impact is measured
A defining feature of impact investing is accountability for outcomes. Investors ask: Are we actually creating the intended impact, and how much? Measurement occurs along three layers:
- Intentionality: A clear theory of change or impact thesis that connects business activities to measurable outcomes.
- Measurement: The use of credible metrics and data collection to track progress. Common frameworks include IRIS+ (a catalog of impact indicators), the UN Sustainable Development Goals (SDGs), and customized KPI dashboards.
- Verification: Third-party data verification or impact reporting to ensure reliability and transparency.
Together, these layers help investors answer a fundamental question: Is the investment moving the needle on the intended problem?
Key methods to know you’re having an impact
1. Define a theory of change: Before investing, articulate how the company’s activities will create measurable outcomes. This roadmap guides what to measure and when.
2. Set specific indicators: Choose indicators tied to the impact thesis (e.g., number of jobs created, tons of carbon avoided, students served). Use a mix of leading and lagging indicators to capture early progress and long-term results.
3. Establish baselines and targets: Baselines show where you started; targets set expectations for improvement. Regularly measure against these benchmarks to gauge progress.
4. Monitor and report: Ongoing data collection, periodic reporting, and accessible dashboards help investors, portfolio managers, and beneficiaries understand impact performance over time.
5. Verify independently: Independent evaluations or third-party audits increase trust in reported outcomes and help compare across investments.
6. Consider double- and triple-bottom-line outcomes: Some investors track financial return alongside social and environmental results to assess overall value delivered to stakeholders.
Impact vs. ESG and philanthropy
Impact investing sits between traditional investing and philanthropy. ESG investing typically screens or tilts portfolios toward environmental, social, and governance factors, but does not always require explicit outcomes or monetary returns tied to impact. Philanthropy prioritizes social good with no financial return. Impact investing seeks to blend financial performance with measurable impact, balancing the two goals within market-based mechanisms.
Common challenges and best practices
Measuring impact can be complex. Data quality, attribution (linking outcomes directly to the investment), and evolving standards can complicate reporting. Best practices include:
- Co-create metrics with beneficiaries and partners to ensure relevance.
- Use standardized frameworks where appropriate to enable comparisons across investments.
- Be transparent about limitations and uncertainties in data and outcomes.
- Iterate: adjust targets and data collection methods as programs mature.
Successful impact investors treat measurement as an ongoing discipline, not a one-time requirement. The result is a clearer view of what is working, what isn’t, and how to scale effective solutions.
Putting it into practice
For someone considering impact investing, begin with a well-defined thesis and a credible measurement plan. Look for investment managers who provide explicit impact metrics, baselines, and third-party verifications. Compare opportunities not only by potential returns but by the strength and credibility of their impact evidence. When impact is built into the financial structure and transparently reported, it becomes possible to see not just a financial yield, but a real, accountable contribution to society.
