Impact Investing
Impact investing is investment made to produce a measurable social or environmental benefit alongside a financial return — investors back companies for the outcome they deliver, measure it and report it, at returns from concessional to market-rate. ESG screens ordinary investments for risk; an impact investor chooses the investment for the impact. In fintech the thesis is financial inclusion.
- Also known as
- Impact investment, Impact fund, Mission-driven investing
- Used at
- dedicated impact funds and the impact arms of large managers; development finance institutions (the IFC, CDC/BII, FMO, DEG) as anchors; foundations and family offices; sovereign and pension funds with impact allocations
- Binding
- the fund's mandate and its impact measurement framework; standards such as the IFC Operating Principles, the GIIN's IRIS+ metrics, and increasingly SFDR Article 9 in the EU
- Typical scale
- the GIIN estimated the market at over $1 trillion of assets by 2022; fintech and financial inclusion are among its largest sectors, particularly in emerging markets
- Typical fintech impact cases
- microfinance and SME lenders in Africa and Asia, mobile-money and remittance companies, agent-banking networks, insurtech for the uninsured, and credit-scoring for the unscored
- Parties
- impact investors and DFIs, the companies, the beneficiaries whose outcomes are measured, and the auditors and frameworks that verify the measurement
How impact investing works in practice
A fund raises $200m from foundations, a development finance institution and two pension funds, with a mandate to invest in financial inclusion in Africa and South Asia. Its investment process runs a financial case and an impact case side by side: the company must be a business the fund believes will return capital, and it must serve people who were unserved, measurably — number of first-time borrowers, cost of a remittance against the incumbent's, savings balances of low-income customers. The fund invests, measures the outcomes yearly, and reports them to its investors alongside the financials. At exit it prefers buyers who will keep the mission, and sometimes takes a lower price from one.
The tension is real and managed rather than resolved. A lender to the unbanked that charges 60% a year is inclusive and extractive at once; a mobile-money company that reaches millions may do so on fees the poorest cannot afford. Impact funds set guardrails — pricing caps, consumer-protection standards, client-protection certifications — and their DFI investors enforce them. The returns question is answered by fund: some target market-rate and report it; some accept concessional returns for deeper impact and say so.
For a fintech founder the impact investor is a source of patient capital and credibility with regulators in markets where the regulator wants inclusion — and a shareholder who will ask about interest rates at every board.
Example
An impact fund invests $15m for 20% in an SME lender in East Africa that lends to shopkeepers at 3% a month against mobile-money transaction data. Its impact metrics: 40,000 borrowers, 70% first-time formal credit, 45% women-owned businesses, a default rate of 4%, a pricing cap the fund negotiated at 3.5% a month. Five years later the lender has 300,000 borrowers, is profitable, and is bought by a regional bank for $180m: the fund's stake returns $36m — 2.4×, a market-rate return — and the sale agreement carries a covenant that the pricing cap and the client-protection certification survive for three years. The fund reports both numbers to its investors; the DFI among them reads the second first.
Common mistakes
- Calling an ordinary investment "impact" because the sector sounds virtuous — impact-washing, which the frameworks now police. - Impact metrics chosen because they are easy to count rather than because they measure the outcome. - No pricing or consumer-protection guardrails in a lender to the poor. - Selling a company to a buyer who will drop the mission on completion, with no covenant. - Investors expecting market returns from a fund whose mandate was concessional, or the reverse.